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Full text of "Recommendations and Reports - 1986"

Office of fhe Chairman 

AdminlsTrative Conference of the United Stores 



3j^ 



minisrraiive 
Conference 
of the 
United States 



ecommendations 
and Reports 




1986 



Indexed Bibliograptiy 

1968-1986 




Administrative Conference of the United States 



The Administrative Conterence of the United States was established by statute as an 
independent agency of the federal government in 1964. Its purpose is to promote 
improvements in the efficiency, adequacy and fairness of procedures by which federal 
agencies conduct regulatory programs, administer grants and benefits, and perform 
related governmental functions. 

To this end, the Conference conducts research and issues reports concerning various 
aspects of the administrative process and, when warranted, makes recommendations 
to the President, Congress, particular departments and agencies, and the judiciary 
concerning the need for procedural reforms. Implementation of Conference recom- 
mendations may be accomplished through direct action on the part of the affected 
agencies or legislative changes. 



Administrative 
Conference 
of thie 
United States 



Recommendations 
and Reports 



1986 



Cite as: 
1986 ACUS 



CONTENTS 



Page 



RECOMMENDATIONS of the 

Administrative Conference of the United States 

Recommendation 86-1: Nonlawyer Assistance 

and Representation 3 

Use of Federal Rules of Evidence 

in Federal Agency Adjudications 6 

Agencies' Use of Alternative 

Means of Dispute Resolution 9 

The Split-Enforcement Model 

for Agency Adjudication 18 

Medicare Appeals 21 

Petitions for Rulemaking 27 

Case Management as a Tool 

for Improving Agency Ajudication.. 30 
Acquiring the Services of "Neutrals" 

for Alternative Means of 

Dispute Resolution 37 



Recommendation 86-2: 

Recommendation 86-3: 

Recommendation 86-4: 

Recommendation 86-5 
Recommendation 86-6 
Recommendation 86-7 

Recommendation 86-8: 



BACKGROUND REPORTS for Recommendations 

Rec. 86-1: Zona Fairbanks Hostetler Nonlawyer Assistance to 
Individuals in Federal Mass Justice Agencies: 
The Need for Improved Guidelines >47 

Rec. 86-2: Richard J. Pierce, Jr. Use of the Federal Rules 

of Evidence in Federal Agency Adjudications... 133 

Rec. 86-3: Philip J. Harter. Points on a Continuum: 
Dispute Resolution Procedures 
and the Administrative Process 165 

Rec. 86-4: George Robert Johnson, Jr. The Split- 
Enforcement Model: Some Conclusions 
from the OSHA and MSHA Experiences 293 

Rec. 86-5: Eleanor D. Kinney. The Medicare Appeals 

System for Coverage and Payment Disputes 339 

Rec. 86-6: William V. Luneburg. Petitions for Rulemaking: 
Federal Agency Practice and 
Recommendations for Improvement 493 

Rec. 86-7: Richard B. Cappalli. Model for Case 

Management: The Grant Appeals Board 663 

Charles Pou, Jr. and Charlotte Jones. Agency 
Time Limits as a Tool 
for Reducing Regulatory Delay 835 

Rec. 86-8: George D. Ruttinger. Acquiring the Services of 
Neutrals for Alternative Means of Dispute 
Resolution and Negotiated Rulemaking 863 

INDEXED BIBLIOGRAPHY: 

Sue Judith Boley. Administrative Conference of the United States: 

A Bibliography 1968-1986 951 



RECOMMENDATIONS OF THE 

ADMINISTRATIVE CONFERENCE 

OF THE 

UNITED STATES 



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RECOMMENDATION 86-1: 
NONLAWYER ASSISTANCE AND 
REPRESENTATION 



A substantial number of individuals involved in federal "mass 
justice"^ agency proceedings need and desire assistance^ in filling 
out forms, filing claims, and appearing in agency proceedings, but 
are unable to afford assistance or representation by lawyers. A 
lack of assistance or representation reduces the probability that an 
individual will obtain favorable results in dealing with an agency. 
Further, unassisted individuals are more likely than those who are 
assisted to cause a loss of agency efficiency by requiring more 
time, effort, and help from the agency. 

Federal agencies currently provide help to persons involved in 
agency proceedings through information given by agency 
personnel and through funding of legal aid programs and approval 
or payment of attorney fee awards. This recommendation does 



^The term "mass justice" is used here to categorize an agency 
program in which a large number of claims or disputes involving 
individual or family matters come before an agency; e.g., the Old 
Age Survivors and Disability Insurance program administered by 
the Social Security Administration. To the extent that principles 
incorporated in this recommendation may be applicable to other 
programs in which non-lawyer assistance or representation is (or 
could be made) available, the Conference recommends the 
consideration of these principles by the agencies involved. 

^The term "assistance" is used here to indicate all forms of help, 
including representation, that may be beneficial to a person in 
dealing with an agency. The term "representation" is used 
whenever the most likely form of assistance involves such 
activities as making an appearance, signing papers, or speaking for 
the assisted individual. Neither term is meant to be exclusive. 



i ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

not deal with whether government aid may be needed for persons 
who cannot afford any form of assistance. This recommendation 
focuses on the potential for increasing the availability of assistance 
by nonlawyers. Federal agency experience and statistics indicate 
that qualified persons who are not lawyers generally are capable of 
providing effective assistance to individuals in mass justice agency 
proceedings. 

While it is recognized that no established privilege protects 
the confidentiality of communications between nonlawyers and 
their clients, agencies may adopt some protections covering their 
own proceedings. The possible limitation of such protections does 
not outweigh the benefits of increased assistance and 
representation. 

Agency practices do not currently maximize the potential for 
free choice of assistance, and, in some instances, may hinder the 
availability of qualified, low-cost assistance by nonlawyers. 
Agencies should take the steps necessary to encourage— as well as 
eliminate inappropriate barriers to— nonlawyer assistance and 
representation. 

Agencies generally have the authority to authorize any person to 
act as a representative for another person having business with the 
agency. Where an agency intends to permit nonlawyers to assist 
individuals in agency matters, the agency needs to state that 
intention affirmatively in its regulations for two reasons. First, an 
affirmative statement is essential, under existing case law, to 
protect a nonlawyer from prosecution— under state "unauthorized 
practice of law" prohibitions— for assisting and advising a federal 
client preparatory to commencing agency proceedings, as well as 
for advertising the availability of services. Second, an affirmative 
agency position is needed to overcome a common assumption of 
nonlawyers that agencies welcome only lawyers as representatives, 
and thereby to encourage an increase in the provision of 
nonlawyer services. 



RECOMMENDATION 



1. The Social Security Administration, the Immigration and 
Naturalization Service, the Veterans Administration, the Internal 
Revenue Service, and other federal agencies that deal with a 
significant number of unassisted persons who have individual or 



OFFICIAL RECOMMENDATIONS t 

family claims or disputes before the agency, should review their 
regulations regarding assistance and representation. The review 
should be directed toward the goals of authorizing increased 
assistance by nonlawyers, and of maximizing the potential for free 
choice of representative to the fullest extent allowed by law. 

2. If an agency determines that some subject areas or types 
of its proceedings are so complex or specialized that only specially 
qualified persons can adequately provide representation, then the 
agency may need to adopt appropriate measures to ensure that 
nonlawyers meet specific eligibility criteria at some or all stages of 
representation. Agencies should tailor any eligibility requirements 
so as not to exclude nonlawyers (including nonlawyers who charge 
fees) as a class, if there are nonlawyers who, by reason of their 
knowledge, experience, training, or other qualification, can 
adequately provide assistance or representation. 

3. Agencies should declare unambiguously their intention to 
authorize assistance and representation by nonlawyers meeting 
agency criteria. Where a declaration by an agency may have the 
effect of preempting state law (such as "unauthorized practice of 
law" prohibitions), then the agency should employ the procedures 
set out in Recommendation 84-5 with regard to notification of 
and cooperation with the states and other affected groups. 

4. Agencies should review their rules of practice that deal 
with attorney conduct (such as negligence, fee gouging, fraud, 
misrepresentation, and representation when there is a conflict of 
interest) to ensure that similar rules are made applicable to 
nonlawyers as appropriate, and should establish effective agency 
procedures for enforcing those rules of practice and for receiving 
complaints from the affected public. 



ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

RECOMMENDATION 86-2: 

USE OF FEDERAL RULES OF EVIDENCE 

IN FEDERAL AGENCY ADJUDICATIONS 



Federal agencies have adopted hundreds of different sets of 
rules governing admission of evidence in formal adjudications. 
While those rules vary in their details, they can be placed in three 
general categories: (1) Rules that reflect the wide open standard 
of APA section 556(d); (2) rules that require presiding officers to 
apply the Federal Rules of Evidence (FRE) "so far as practicable;" 
and, (3) rules that permit presiding officers to use the FRE as a 
source of guidance in making evidentiary rulings. In a few 
instances. Congress has required the agency to adopt a standard 
that refers to the FRE; in other cases the agency voluntarily 
adopted such a standard. 

Presiding officers vary substantially in the extent of their use 
of the FRE as a source of guidance in making evidentiary rulings. 
Presiding officers at agencies whose rules refer to the FRE rely on 
the FRE as a source of guidance much more frequently than 
presiding officers at agencies whose rules reflect only the APA 
standard. Presiding officers at agencies with rules that refer to 
the FRE are more satisfied with the rule they apply than presiding 
officers at agencies with rules that reflect only the APA standard. 
The relative dissatisfaction expressed by many presiding officers 
in the latter group seems to be based on their perception that the 
APA standard does not accord them sufficient discretion to engage 
in responsible case management. Because they perceive that they 
do not have the discretion to exclude evidence they consider 
clearly unreliable, they must devote valuable hearing and opinion- 
writing time to reception and consideration of such evidence. 



OFFICIAL RECOMMENDATIONS "i 

Because the APA evidentiary standard is broadly permissive, 
courts routinely decline to reverse agencies that have adopted this 
standard on the basis of alleged erroneous admission of evidence. 
However, courts seem confused by the FRE "so far as practicable" 
evidence standard. Some courts apparently interpret it to accord 
near total discretion to agencies. Other courts interpret it as a 
mandate to comply with the FRE except in unusual circumstances. 
Still others apparently view the standard as a mandate to admit 
evidence inadmissible under the FRE except when unusual 
circumstances require application of the FRE. 

Independent of the evidentiary standard adopted by the 
agency, reviewing courts apply three general rules: (1) an agency 
must respect evidentiary privileges; (2) an agency can be reversed 
if it declines to admit evidence admissible under the FRE; and 

(3) an agency will be reversed if it bases a finding on unreliable 
evidence. 

The FRE "so far as practicable" standard has four significant 
disadvantages: (1) courts seem confused as to what it means or 
how to enforce it; (2) instructing presiding officers to exclude 
evidence based on the standard forces them to undertake a 
difficult and hazardous task; (3) excluding evidence on the basis 
that it is inadmissible in a jury trial is totally unnecessary to 
insure that agencies act only on the basis of reliable evidence; and 

(4) agencies, like other experts, should be permitted to rely on 
classes of evidence broader than those that can be considered by 
lay jurors. Yet the APA standard alone has the disadvantage that 
presiding officers perceive it as an inadequate tool for effective 
case management, despite the fact that it permits presiding 
officers to use relevant parts of the FRE and scholarly texts as 
sources of general guidance in making evidentiary rulings in 
formal adversarial adjudications. Federal Rule 403 can be 
particularly valuable to presiding officers in discharging their case 
management responsibilities. That rule authorizes exclusion of 
evidence the probative value of which is substantially outweighed 
by other factors, including the consideration of undue delay. In 
addition, under any set of evidentiary rules, an agency can assist 
presiding officers in their evidentiary decisionmaking by 
specifying, insofar as they can be foreseen, the factual issues the 
agency considers material to the resolution of various classes of 
adjudications and the types of evidence it considers reliable and 
probative with respect to recurring factual issues. 



8 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

RECOMMENDATION 



1. Congress should not require agencies to apply the Federal 
Rules of Evidence, with or without the qualification "so far as 
practicable," to limit the discretion of presiding officers to admit 
evidence in formal adjudications.^ 

2. Agencies should adopt evidentiary regulations applicable to 
formal adversarial adjudications that clearly confer on presiding 
officers discretion to exclude unreliable evidence and to use the 
weighted balancing test in Rule 403 of the Federal Rules of 
Evidence, which allows exclusion of evidence the probative value 
of which is substantially outweighed by other factors, including its 
potential for undue consumption of time. 

3. To facilitate the efficient and fair management of the 
proceeding, when otherwise appropriate, an agency should 
announce in advance of a formal adjudication as many of the 
factual issues as the agency can foresee to be material to the 
resolution of the adjudication. 



iThe term "formal adjudications" refers to adjudications 
required by statute to be determined on the record after 
opportunity for an agency hearing in accordance with the 
Administrative Procedure Act, 5 U.S.C. 554, 556 and 557, and also 
includes agency adjudications which by regulation or by agency 
practice are conducted in conformance with these provisions. The 
recommendation does not apply to nonadversarial hearings, e.g.^ 
many Social Security disability proceedings. 



OFFICIAL RECOMMENDATIONS 



RECOMMENDATION 86-3: 

AGENCIES' USE OF ALTERNATIVE MEANS OF 

DISPUTE RESOLUTION 



Federal agencies now decide hundreds of thousands of cases 
annually— far more than do federal courts. The formality, costs 
and delays incurred in administrative proceedings have steadily 
increased, and in some cases now approach those of courts. Many 
agencies act pursuant to procedures that waste litigants' time and 
society's resources and whose formality can reduce the chances 
for consensual resolution. The recent trend toward elaborate 
procedures has in many cases imposed safeguards whose 
transaction costs, to agencies and the public in general, can 
substantially outweigh their benefits. 

A comprehensive solution to reducing these burdens is to 
identify instances where simplification is appropriate. This will 
require a careful review of individual agency programs and the 
disputes they involve. A more immediate step is for agencies to 
adopt alternative means of dispute resolution, typically referred to 
as "ADR," or to encourage regulated parties to develop their own 
mechanisms to resolve disputes that would otherwise be handled 
by agencies themselves. ADR methods have been employed with 
success in the private sector for many years, and when used in 
appropriate circumstances, have yielded decisions that are faster, 
cheaper, more accurate or otherwise more acceptable, and less 
contentious. These processes include voluntary arbitration, 
mandatory arbitration, factfinding, minitrials, mediation, 
facilitating, convening and negotiation. (A brief lexicon defining 
these terms is included in the Appendix to this recommendation.) 
The same forces that make ADR methods attractive to private 
disputants can render them useful in cases which a federal agency 



10 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

decides, or to which the government is a party. For these 
methods to be effective, however, some aspects of current 
administrative procedure may require modification. 
It is premature to prescribe detailed procedures for a myriad of 
government activities since the best procedure for a program, or 
even an individual dispute, must grow out of its own needs. 
These recommendations therefore seek to promote increased, and 
thoughtful, use of ADR methods. They are but a first step, and 
ideally should be supplemented with further empirical research, 
consultation with experts and interested parties, and more specific 
Conference proposals. 



RECOMMENDATION 



A. General 

1. Administrative agencies, where not inconsistent with 
statutory authority, should adopt the alternative methods discussed 
in this recommendation for resolving a broad range of issues. 
These include many matters that arise as a part of formal or 
informal adjudication, in rulemaking, ^ in issuing or revoking 
permits, and in settling disputes, including litigation brought by or 
against the government. Until more experience has been 
developed with respect to their use in the administrative process, 
the procedures should generally be offered as a voluntary, 
alternative means to resolve the controversy. 

2. Congress and the courts should not inhibit agency uses of 
the ADR techniques mentioned herein by requiring formality 
where it is inappropriate. 



B. Voluntary Arbitration 

3. Congress should act to permit executive branch officials to 
agree to binding arbitration to resolve controversies. This 
legislation should authorize any executive official who has 
authority to settle controversies on behalf of the government to 



^See ACUS Recommendations 82-4 and 85-5, "Procedures for 
Negotiating Proposed Regulations," 1 CFR §§305.82-4 and 85-5. 



I 



OFFICIAL RECOMMENDATIONS 11 

agree to arbitration, either prior to the time a dispute may arise or 
after a controversy has matured, subject to whatever may be the 
statutory authority of the Comptroller General to determine 
whether payment of public funds is warranted by applicable law 
and available appropriations. 

4. Congress should authorize agencies to adopt arbitration 
procedures to resolve matters that would otherwise be decided by 
the agency pursuant to the Administrative Procedure Act ("APA") 
or other formal procedures. These procedures should provide 
that— 

(a) All parties to the dispute must knowingly consent 
to use the arbitration procedures, either before or after a 
dispute has arisen. 

(b) The parties have some role in the selection of 
arbitrators, whether by actual selection, by ranking those 
on a list of qualified arbitrators, or by striking individuals 
from such a list. 

(c) Arbitrators need not be permanent government 
employees, but may be individuals retained by the parties 
or the government for the purpose of arbitrating the 
matter. 

(d) Agency review of the arbitral award be pursuant 
to the standards for vacating awards under the U.S. 
Arbitration Act, 9 U.S.C. § 10, unless the award does not 
become an agency order or the agency does not have any 
right of review. 

(e) The award include a brief, informal discussion of 
its factual and legal basis, but neither formal findings of 
fact nor conclusions of law. 

(f) Any judicial review be pursuant to the limited 
m scope-of-review provisions of the U.S. Arbitration Act, 

rather than the broader standards of the APA. 

1^ (g) The arbitral award be enforced pursuant to the 

U.S. Arbitration Act, but is without precedential effect for 
any purpose. 



t 



12 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

5. Factors bearing on agency use of arbitration are: 

(a) Arbitration is likely to be appropriate where— 

(1) The benefits that are likely to be gained 
from such a proceeding outweigh the probable 
delay or costs required by a full trial-type hearing. 

(2) The norms which will be used to resolve 
the issues raised have already been established by 
statute, precedent or rule, or the parties explicitly 
desire the arbitrator to make a decision based on 
some general standard, such as "justice under the 
circumstances," without regard to a prevailing 
norm. 

(3) Having a decisionmaker with technical 
expertise would facilitate the resolution of the 
matter. 

(4) The parties desire privacy, and agency 
records subject to disclosure under the Freedom of 
Information Act are not involved. 

(b) Arbitration is likely to be inappropriate where— 

(1) A definitive or authoritative resolution of 
the matter is required or desired for its precedential 
value. 

(2) Maintaining established norms or policies is 
of special importance. 

(3) The case significantly affects persons who 
are not parties to the proceeding. 

(4) A full public record of the proceeding is 
important. 

(5) The case involves significant decisions as to 
government policy. 

6. Agency officials, and particularly regional or other 
officials directly responsible for implementing an arbitration or 
other ADR procedure, should make persistent efforts to increase 
potential parties' awareness and understanding of these procedures. 



OFFICIAL RECOMMENDATIONS 13 

C. Mandatory Arbitration 

7. Arbitration is not in all instances an adequate substitute 
for a trial- type hearing pursuant to the APA or for civil 
litigation. Hence, Congress should consider mandatory arbitration 
only where the advantages of such a proceeding are clearly 
outweighed by the need to (a) save the time or transaction costs 
involved or (b) have a technical expert resolve the issues. 

8. Mandatory arbitration is likely to be appropriate only 
where the matters to be resolved— 

(a) Are not intended to have precedential effect other 
than the resolution of the specific dispute, except that the 
awards may be published or indexed as informal guidance; 

(b) May be resolved through reference to an 
ascertainable norm such as statute, rule or custom;^ 

(c) Involve disputes between private parties; and 

(d) Do not involve the establishment or 
implementation of major new policies or precedents. 

9. Where Congress mandates arbitration as the exclusive 
means to resolve a dispute, it should provide the same procedures 
as in Paragraph 4, above. 



D. Settlement Techniques 

10. In many situations, agencies already have the authority to 
use techniques to achieve dispute settlements. Agencies should use 
this authority by routinely taking advantage of opportunities to: 

(a) Explicitly provide for the use of mediation. 

(b) Provide for the use of a settlement judge or other 
neutral agency official to aid the parties in reaching 
agreement.^ These persons might, for instance, advise the 



^For example, the Federal Insecticide, Fungicide and 
Rodenticide Act, 7 U.S.C. §136 et seq.^ provides for mandatory 
arbitration with respect to the amount of compensation one 
company must pay another and yet provides no guidance with 
respect to the criteria to be used to make these decisions. The 
program has engendered considerable controversy and litigation. 

^See, e.g., the procedure used by the Federal Energy 
Regulatory Commission. 



14 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

parties as to the likely outcome should they fail to reach 
settlement. 

(c) Implement agreements among the parties in 
interest, provided that some means have been employed to 
identify other interested persons and afford them an 
opportunity to participate. 

(d) Provide for the use of minitrials. 

(e) Develop criteria that will help guide the 
negotiation of settlements.^ 

11. Agencies should apply the criteria developed in ACUS 
Recommendations 82-4 and 85-5, pertaining to negotiated 
rulemaking, 5 in deciding when it may be appropriate to negotiate, 
mediate or use similar ADR techniques to resolve any contested 
issue involving an agency. Settlement procedures may not be 
appropriate for decisions on some matters involving major public 
policy issues or having an impact on persons who are not parties, 
unless notice and comment procedures are used. 

12. Factors bearing on agency use of minitrials as a 
settlement technique are: 

(a) Minitrials are likely to be appropriate where— 

(1) The dispute is at a stage where substantial 
additional litigation costs, such as for discovery, are 
anticipated. 

(2) The matter is worth an amount sufficient 
to justify the senior executive time required to 
complete the process. 

(3) The issues involved include highly technical 
mixed questions of law and fact. 

(4) The matter involves materials that the 
government or other parties believe should not be 
revealed. 



^See ACUS Recommendation 79-3, "Agency Assessment and 
Mitigation of Civil Money Penalties," 1 CFR §305.79-3. 

^See also, ACUS Recommendation 84-4, "Negotiated Cleanup 
of Hazardous Waste Sites Under CERCLA," 1 CFR §305.84-4. 



OFFICIAL RECOMMENDATIONS 15 

(b) Minitrials are likely to be inappropriate where— 

(1) Witness credibility is of critical importance. 

(2) The issues may be resolved largely through 
reference to an ascertainable norm. 

(3) Major questions of public policy are 
involved. 

13. Proposed agency settlements are frequently subjected to 
multiple layers of intra-agency or other review and therefore may 
subsequently be revised. This uncertainty may discourage other 
parties from negotiating with federal officials. To encourage 
settlement negotiations, agencies should provide means by which 
all appropriate agency decisionmakers are involved in, or regularly 
apprised of, the course of major negotiations; agencies should also 
endeavor to streamline intra-agency review of settlements. These 
efforts should serve to ensure that tlie concerns of interested 
segments of the agency are reflected as early as possible in 
settlement negotiations, and to reduce the likelihood that tentative 
settlements will be upset. 

14. In cases where agencies must balance competing public 
policy interests, they should adopt techniques to enable officials to 
assess, in as objective a fashion as possible, the merits of a 
proposed settlement. These efforts might include establishing a 
small review panel of senior officials or neutral advisors, using a 
minitrial, publishing the proposed settlement in the Federal 
Register for comment, securing tentative approval of the 
settlement by the agency head or other senior official, or 
employing other means to ensure the integrity of the decision. 

15. Some agency lawyers, administrative law judges, and 
other agency decisionmakers should be trained in arbitration, 
negotiation, mediation, and similar ADR skills, so they can (a) be 
alert to take advantage of alternatives or (b) hear and resolve other 
disputes involving their own or another agency. 



E. Private Sector Dispute Mechanisms 

16. Agencies should review the areas that they regulate to 
determine the potential for the establishment and use of dispute 
resolution mechanisms by private organizations as an alternative to 
direct agency action. Where such use is appropriate, the agency 
should— 



16 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

(a) Specify minimal procedures that will be acceptable 
to qualify as an approved dispute resolution mechanism. 

(b) Oversee the general operation of the process; 
ordinarily, it should not review individual decisions. 

(c) Tailor its requirements to provide an organization 
with incentives to establish such a program, such as 
forestalling other regulatory action, while ensuring that 
other interested parties view the forum as fair and 
effective. 



Appendix 



Lexicon of Aftemative Means of Dispute Resolution 

Arbitration. Arbitration is closely akin to adjudication in that 
a neutral third party decides the submitted issue after reviewing 
evidence and hearing argument from the parties. It may be 
binding on the parties, either through agreement or operation of 
law, or it may be non-binding in that the decision is only 
advisory. Arbitration may be voluntary, where the parties agree 
to resolve the issues by means of arbitration, or it may be 
mandatory, where the process is the exclusive means provided. 

Factfinding. A "factfinding" proceeding entails the 

appointment of a person or group with technical expertise in the 
subject matter to evaluate the matter presented and file a report 
establishing the "facts." The factfinder is not authorized to resolve 
policy issues. Following the findings, the parties may then 
negotiate a settlement, hold further proceedings, or conduct more 
research. 

Minitrial. A minitrial is a structured settlement process in 
which each side presents a highly abbreviated summary of its case 
before senior officials of each party authorized to settle the case. 
A neutral adviser sometimes presides over the proceeding and will 
render an advisory opinion if asked to do so. Following the 
presentations, the officials seek to negotiate a settlement. 

Mediation. Mediation involves a neutral third party to assist 
the parties in negotiating an agreement. The mediator has no 
independent authority and does not render a decision; any decision 
must be reached by the parties themselves. 



OFFICIAL RECOMMENDATIONS 17 

Facilitating. Facilitating helps parties reach a decision or a 
satisfactory resolution of the matter to be addressed. While often 
used interchangeably with "mediator," a facilitator generally 
conducts meetings and coordinates discussions, but does not 
become as involved in the substantive issues as does a mediator. 

Convening. Convening is a technique that helps identify 
issues in controversy and affected interests. The convenor is 
generally called upon to determine whether direct negotiations 
among the parties would be a suitable means of resolving the 
issues, and if so, to bring the parties together for that purpose. 
Convening has proved valuable in negotiated rulemaking. 

Negotiation. Negotiation is simply communication among 
people or parties in an effort to reach an agreement. It is used so 
routinely that it is frequently overlooked as a specific means of 
resolving disputes. In the administrative context, it means 
procedures and processes for settling matters that would otherwise 
be resolved by more formal means. 



18 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

RECOMMENDATION 86-4: 

THE SPLIT-ENFORCEMENT MODEL 

FOR AGENCY ADJUDICATION 



Separation of functions in administrative adjudication has 
usually been achieved through internal barriers within the agency 
which separate and insulate those employees who judge from those 
who investigate and prosecute. The chains of command, however, 
come together at the top in the person of the head or heads of the 
agency, who, through subordinates, are responsible for all three 
functions. Internal separation of functions is sanctioned and 
contemplated by the Administrative Procedure Act. When 
combined with the protections accorded to administrative law 
judges who preside over adjudicatory hearings, it appears, on the 
whole, to have worked satisfactorily in providing fair and 
impartial factfinding, while permitting the agency to speak with a 
single voice on matters of law and policy. Yet the experience 
with internal separation of functions has never entirely silenced 
the critics who argue that it is impossible to achieve evenhanded 
justice when enforcement and adjudicative functions are lodged in 
the same agency. 

Congress has, therefore, on a number of occasions sought to 
carry separation of functions a step further. In the Occupational 
Safety and Health Act of 1970, an agency in the Department of 
Labor, the Occupational Safety and Health Administration 
(OSHA), was assigned the responsibility for promulgating 
industrial health and safety standards and for enforcing these 
standards through inspections and the filing of complaints against 
employers. The responsibility for adjudicating such complaints, 
however, was assigned to a wholly independent three-member 
agency, the Occupational Safety and Health Review Commission 



OFFICIAL RECOMMENDATIONS 19 

(OSHRC), which employs administrative law judges to hear 
enforcement cases brought by OSHA and to issue initial decisions 
subject to commission review. A similar division of 

responsibilities was created in the area of mine safety and health 
in the Federal Mine Safety and Health Amendments Act of 1977. 
This statute assigned rulemaking and enforcement to the Mine 
Safety and Health Administration in the Department of Labor and 
adjudication to the independent Federal Mine Safety and Health 
Review Commission (FMSHRC).l 

An Administrative Conference study of the experience with 
the "split-enforcement model" used in the occupational safety and 
mine safety legislation was unable to conclude whether this model 
achieves greater fairness in adjudication than does the traditional 
structural model. Fairness is an important but an unquantifiable 
and subjective value. Therefore, the Conference takes no position 
on whether the split-enforcement model is preferable to a 
structure in which responsibilities for rulemaking, enforcement 
and adjudication are combined within a single agency. Our study 
did reveal, however, that because Congress, in enacting the 
Occupational Safety and Health Act, did not specify clearly the 
respective responsibilities of OSHA and OSHRC in resolving 
questions of law and policy, unnecessary conflicts have arisen 
between the agencies and there has been confusion expressed by 
reviewing courts over which agency's views were entitled to the 
greater deference. For a variety of reasons these conflicts and 
confusion have been largely avoided in the later enacted mine 
safety legislation. 



RECOMMENDATION 



1. Where Congress establishes an enforcement scheme in 
which rulemaking and prosecution are assigned to one agency and 
adjudication to another agency, it should make clear in which 
agency it intends to place programmatic responsibility and direct 
the courts to look to that agency for authoritative expressions of 
law or policy. Congress should also attempt to foresee other areas 



^The system for enforcing certain provisions of the Federal 
Aviation Act also conforms generally to this model but was not 
part of the study. See 49, App. U.S.C. §1903 (a)(9). 



20 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

of potential conflict, such as control over litigation and 

settlements, and should so far as possible specify the respective 

responsibilities of each agency and the procedures for resolving 
disagreements. 

2. Generally speaking. Congress should provide that in 
adjudicatory challenges to standards promulgated pursuant to 
agency statutory authority, the adjudicatory agency must accept 
the rulemaking agency's interpretation of the standard unless it 
can be shown that the rulemaking agency's interpretation is 
arbitrary, capricious, or otherwise not in accordance with law. So 
far as is practical, the rulemaking agency should provide notice to 
the affected public concerning the administrative interpretation of 
its rules and regulations, the policies that they represent, and their 
intended implementation in enforcement. 

3. Where uncertainties exist with regard to the responsibilities 
of agencies already implementing split-enforcement schemes, 
Congress should act to resolve those uncertainties consistent with 
the foregoing, if the agencies are unable to do so. 



OFHCIAL RECOMMENDATIONS 21 



RECOMMENDATION 86-5: 
MEDICARE APPEALS 



The Medicare program, since 1965, provides health insurance 
for nearly all elderly and most disabled Americans. The program 
relies on hospitals, nursing homes and other health care 
institutions (under "Part A" of the program) and physicians and 
suppliers (under "Part B") to provide benefits to its beneficiaries. 

This program, serving 30 million persons, has been 
administered since 1977 by the Health Care Financing 
Administration (HCFA), within the Department of Health and 
Human Services (HHS). Congress purposefully created a 
decentralized system, with implementation by localized carriers 
and intermediaries, primarily insurance companies. HCFA 
contracts with these organizations to administer the millions of 
claims made by beneficiaries each year and the resulting payments 
to providers. For Part A these organizations are known as "fiscal 
intermediaries" and for Part B they are referred to as "carriers." 
Additionally, statutorily - mandated peer review organizations 
(PROs), made up of physician-controlled organizations under 
contract with HCFA, have been given new responsibility to decide 
many disputes raised by beneficiaries and hospitals under Part A. 
To guide its contractors, HCFA issues health insurance manuals 
containing detailed instructions, though they normally are not 
published through notice-and-comment rulemaking. 

HCFA also issues "national coverage decisions" on whether 
new medical technologies and procedures are covered by 
Medicare. These decisions are sometimes made after a 
recommendation is sought from the HHS Office of Health 
Technology Assessment (OHTA). Only when OHTA advice is 
sought does HCFA publish notice in the Federal Register. In most 



22 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

cases, affected manufacturers, providers and beneficiaries have no 
notice or opportunity to file comments on proposed action, and 
neither HCFA nor OHTA has published its decisionmaking 
procedures or its criteria for making these decisions. 

Rapidly rising program expenditures, especially inflation in 
hospital care costs, led Congress to take a number of steps to 
control costs. In 1982, the PRO system was created and was 
delegated important responsibility to deny Medicare payment for 
inappropriate or unnecessary services and to sanction providers for 
improper practices. In the following two years Congress froze 
physician charges for fifteen months and completely revamped the 
reimbursement system for hospitals by creating the "prospective 
payment system" under which Medicare pays hospitals a 
predetermined fixed price for each patient case (according to a 
classification system of some 470 Diagnosis Related Groupings or 
DRGs), regardless of the actual costs incurred in treating that 
patient. The prices are subject to annual updating and the 
classification system is to be reviewed annually. Congress created 
the advisory Prospective Payment Assessment Commission to 
participate in this process. Additionally, to mitigate fears that the 
prospective payment system might lead to unnecessary brief 
admissions or premature release of patients. Congress charged the 
PROs with the responsibility for monitoring hospital admissions 
and discharge practices. In the first years of this program, 
hospital admissions for the elderly declined for the first time since 
1965, the average length of stay also declined and there was a 
greater utilization of outpatient services. Moreover, many 
hospitals have made record profits under the new system while 
reducing the rate of inflation in hospital costs. There has also 
been a marked increase in physician (Part B) services, as patients 
have moved out of hospitals and into outpatient care, and to 
greater reliance on home health services. 

The Medicare appeals system is a patchwork with differing 
administrative and judicial review requirements for beneficiaries 
and providers and differing rules for Part A and Part B appeals. 

Under Part A, most cases are beneficiary appeals primarily 
involving coverage determinations. Initial determinations are by 
PROs if hospital services are involved and by fiscal intermediaries 
for other Part A services. A reconsideration step is built in. 
After this "paper review," administrative review is then available 
by an administrative law judge in the Social Security Office of 
Heariags and Appeals if the amount in controversy exceeds $100 



OFFICIAL RECOMMENDATIONS 23 

($200 in hospital cases). The SSA Appeals Council may review 
and reverse the ALJ's decision on its own motion. Judicial review 
in the district court is available for the beneficiary if the amount 
in controversy is $1000 ($2000 in hospital cases). 

Providers who have disputes concerning reimbursement under 
Part A (over $10,000) may bring appeals to the Provider 
Reimbursement Review Board (PRRB), a five-member board 
within HHS. (Appeals involving amounts between $1,000 and 
$10,000 are heard by fiscal intermediaries.) The Secretary may 
review PRRB decisions on his own motion and providers have a 
right to judicial review. The PRRB's effectiveness as an 
independent adjudicator of provider payment disputes has been 
called into question by provider groups who have raised concerns 
about its independence, jurisdiction, slowness and its procedures 
for handling group appeals. Moreover, the PRRB's role under the 
prospective payment system has been changing. The Board does 
retain jurisdiction over appeals remaining under the old system 
and over some key issues concerning allowable costs, and 
availability of payments under the new system. But, HCFA 
rulings and regulations have constrained the PRRB's jurisdiction 
in prospective payment rate cases and provided that it may not 
order retrospective correction of errors in those rates. Moreover, 
some key provider appeals such as those involving errors in DRG 
assignment have been transferred to PROs. No further review is 
available in such cases. 

Until passage of the Omnibus Budget Reconciliation Act of 
1986, P.L. 99-509, there was no administrative and judicial review 
of Part B claims. However, under the new law, beneficiaries with 
disputed claims of over $500 (and physicians who have accepted 
assignment of such claims) have a right to a hearing before an 
administrative law judge, and to subsequent judicial review if the 
claim exceeds $1,000. Previously there was no judicial review and 
beneficiaries with Part B claims exceeding $100 were limited to a 
"fair hearing" before an officer selected by the carrier. (This 
procedure will continue for claims between $100 and $500 under 
the new legislation.) 

The new legislation also made several other important changes 
in the laws affecting Medicare. The legislation: 

— authorizes persons affiliated with providers to represent 
beneficiaries in Part A appeals as long as no financial liability is 
imposed in connection with the representation; 



24 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

-- requires that HCFA regulations regarding the Medicare 
program provide for a 60-day comment period; 

— requires expanded notice procedures for medicare patients 
concerning their hospital discharge rights; 

-- mandates various new requirements on PROs to review 
beneficiary complaints and to review the quality of care provided; 
and 

-- expands appeal rights in home health care cases involving 
so-called "technical denials" of benefits. 

The Conference welcomes these changes. Indeed, at the time of 
their enactment, the Conference was actively considering 
recommendations concerning some of them. Other aspects of the 
process, however, also deserve modification or, at least, further 
study. We therefore call upon HCFA to continue its efforts to 
improve the implementation of this important program by heeding 
the following specific suggestions. 



RECOMMENDATION 



I. Publication of Policies 

A. The Health Care Financing Administration (HCFA) 
should keep up to date and provide reasonable access to all 
standards, guidelines and procedures used in making coverage and 
payment determinations under Part A and Part B of the Medicare 
program. 

B. In promulgating interpretations of Medicare benefits likely 
to have substantial impact on the public, HCFA should adopt 
procedures that allow for public comment (either pre- 
promulgation or post-adoption). See ACUS Recommendation 76- 
5. 

C. HCFA by regulation (or Congress by legislation if 
necessary) should require fiscal intermediaries and carriers to 
publish and provide reasonable access to all insurance industry 
rules or other screening devices used in making coverage and 
payment determinations under Part A and Part B. 

D. HHS should introduce more openness and regularity into 
the procedure for issuing "national coverage decisions" pertaining 
to new medical technologies and procedures, through: 



OFFICIAL RECOMMENDATIONS 25 

(1) development of published decisional criteria; (2) providing 
for notice and inviting comments in such cases, both in HCFA's 
decisionmaking process and in the process by which the HHS 
Office of Health Technology Assessment supplies 
recommendations to HCFA; and (3) providing for internal 
administrative review or reconsideration of such decisions. 



n. Administrative Appeal Procedures 

A. HCFA should continue to develop and assess the adequacy 
and timing of notice to beneficiaries about coverage and payment 
decisions on medical benefits and appeal rights regarding these 
decisions. 

B. Because of the increased caseload in Medicare appeals 
adjudication anticipated after the recent enactment of new appeal 
rights in Part B cases, HHS should consider whether modification 
of the existing adjudicatory system is necessary, including whether 
to establish a Medicare appeals division with its own 
administrative law judges and review procedure. 

C. When resolving hospital rate appeals under the prospective 
payment system, the Provider Reimbursement Review Board 
should be authorized, by regulation (or, if necessary, by 
legislation) to assume jurisdiction of an individual hospital's 
appeal in a manner that affords timely relief to successful 
appellants. 



in. Suggestions for Further Study 

HCFA should undertake or support additional research in the 
following areas: 

A. An empirical study of the role, performance and 
procedures of: 

(1) Fiscal intermediaries and carriers in making coverage and 
payment determination under Part A and Part B; 

(2) Peer review organizations in adjudicating Part A appeals 
by beneficiaries and by hospitals under the prospective payment 
system. 

B. A comprehensive analysis of the current administrative 
arrangement by which hospital payment rates are updated under 



26 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

the prospective payment system (taking into account the need for 
fair ratemaking, timely resolution of disputes and budgetary 
controls), including an assessment of the Prospective Payment 
Assessment Commission in this process. 

C. An examination of the future role and responsibilities of 
the Provider Reimbursement Review Board under the prospective 
payment system, including its jurisdiction, need for expedited 
review procedures for group appeals, qualifications for 
membership, adequacy of budget and administrative support, and 
the need for independence from the rest of the Department. 

D. An examination of whether or not the implementation of 
the statutorily-mandated peer review program should be done to a 
greater extent through notice-and-comment rulemaking, rather 
than through reliance upon program instructions and contract 
provisions. 

E. A study of HCFA's use of statistical sampling techniques 
to determine project overpayments to a provider for a given year, 
and whether the use of these techniques may effectively deny 
beneficiaries or providers the opportunity to challenge payment 
determinations based on actual claims experience. 

F. A study of whether, in hospital rate appeals, HCFA 
should allow retroactive correction of erroneous calculations of a 
hospital's payment rate for affected prior years under the 
prospective payment system, and payment to hospitals accordingly. 

G. A study of the process by which ALJ reversals of claim 
denials are implemented by intermediaries and providers, 
including the need for tighter accounting of payments to 
beneficiaries and reimbursements to providers. 

H. An examination of the feasibility and utility of setting 
internal time guidelines for each stage of the Medicare appeals 
process, including reconsiderations; ALJ hearings and Appeals 
Council review. 



OFFICIAL RECOMMENDATIONS 27 



RECOMMENDATION 86-6: 
PETITIONS FOR RULEMAKING 



The Administrative Procedure Act (APA) requires each 
federal agency to give interested persons the right to petition for 
the issuance, amendment, or repeal of a rule, 5 U.S.C. §553(e). 
The APA also requires that agencies conclude matters presented to 
them within a reasonable time, 5 U.S.C. §555(b), and give prompt 
notice of the denial of actions requested by interested persons, 5 
U.S.C. §555(e). The APA does not specify the procedures agencies 
must follow in receiving, considering, or disposing of public 
petitions for rulemaking.^ However, agencies are expected to 
establish and publish such procedures in accordance with the 
public information section of the APA. See Attorney General's 
Manual on the Administrative Procedure Act 38 (1947). An 
Administrative Conference study of agency rulemaking petition 
procedures and practices found that while most agencies with 
rulemaking power have established some procedures governing 
petitions for rulemaking, few agencies have established sound 
practices in dealing with petitions or responded promptly to such 
petitions. 

This Recommendation sets forth the basic procedures that 
the Conference believes should be incorporated into agency 
procedural rules governing petitions for rulemaking. In addition, 
the Conference encourages agencies to adopt certain other 
procedures and policies where appropriate and feasible. The 
Conference feels that, beyond this basic level, uniform 



^ But other statutes expressly create the right to petition for 
rulemaking, and some of these statutes specify procedures to be 
followed in the petitioning process. 



28 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

Specification of agency petition procedures would be undesirable 
because there are significant differences in the number and nature 
of petitions received by agencies and in the degree of 
sophistication of each agency's community of interested persons. 

Agencies should review their rulemaking petition 
procedures and practices and, in accordance with this 
Recommendation, adopt measures that will ensure that the right to 
petition is a meaningful one. The existence of the right to 
petition reflects the value Congress has placed on public 
participation in the agency rulemaking process. The 

Administrative Conference has recognized, in past 
recommendations, the benefits flowing from public participation 
in agency rulemaking and from publication of the means for such 
participation. 2 The absence of published petition procedures, 
excessive or rigidly-enforced format requirements, and the failure 
to act promptly on petitions for rulemaking may undermine the 
public's right to file petitions for rulemaking. 

Some agencies currently have petition-for-rulemaking 
procedures that are more elaborate than those recommended in 
this Recommendation. This Recommendation is not intended to 
express a judgment that such procedures are inappropriate or that 
the statutes mandating particular procedures should be amended. 
Nor is the Recommendation intended to alter the prior position of 
the Conference recommending elimination of the categorical 
exemptions of certain types of rulemaking from the APA's 
rulemaking requirements. See Recommendations 69-8 and 73-5. 
To the extent Congress or agencies adopt those recommendations, 
they should also expressly apply the right to petition to those types 
of rulemaking. 



2 See Recommendation 69-8, Elimination of Certain 
Exemptions from the APA Rulemaking Requirements^ 1 C.F.R. 
§305.69-8; Recommendation 71-6, Public Participation in 
Administrative Hearings, 1 C.F.R. §305.71-6; Recommendation 
73-5, Elimination of the "Military or Foreign Affairs Function" 
Exemption from APA Rulemaking Requirements^ 1 C.F.R. §305.73- 
5; Recommendation 76-5, Interpretive Rules of General 
Applicability and Statements of General Policy, 1 C.F.R. §305.76- 
5; and Recommendation 83-2, The "Good Cause" Exemption from 
APA Rulemaking Requirements, 1 C.F.R. §305.83-2. 



OFHCIAL RECOMMENDATIONS 29 

RECOMMENDATION 



1. Agencies should establish by rule basic procedures for the 
receipt, consideration, and prompt disposition of petitions for 
rulemaking. These basic procedures should include: (a) 
specification of the address(es) for the filing of petitions and an 
outline of the recommended contents of the petition, such as the 
name, address, and telephone number of the petitioner, the 
statutory authority for the action requested, and a description of 
the rule to be issued, amended, or repealed; (b) maintenance of a 
publicly available petition file; and (c) provision for prompt 
notification to the petitioner of the action taken on the petition, 
with a summary explanatory statement. 

2. In addition, agencies should, where appropriate and 
feasible: 

a. make their petition procedures expressly applicable to 
all types of rules the agency has authority to adopt; 

b. provide guidance on the type of data, argumentation, 
or other information the agency needs to consider petitions; 

c. develop effective methods for providing notice to 
interested persons that a petition has been filed and identify the 
agency office or official to whom inquiries and comments should 
be made; and, 

d. establish internal management controls to assure the 
timely processing of petitions for rulemaking, including deadlines 
for completing interim actions and reaching conclusions on 
petitions and systems to monitor compliance with those deadlines. 



30 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

RECOMMENDATION 86-7: 

CASE MANAGEMENT AS A TOOL FOR 

IMPROVING AGENCY ADJUDICATION 



Reducing the delay, expense and unproductive legal 
maneuvering found in many adjudications is recognized as a 
crucial factor in achieving substantive justice. In recent years, the 
negative side effects of civil litigation and agency adjudication 
procedures have begun to receive increased attention, and many 
judges, informed scholars and other experienced observers now 
cite lawyer control of the pace and scope of most cases as a major 
impediment. In the federal judicial sphere, and increasingly in 
the state judiciary, a consensus is developing that efficient case 
management is part of the judicial function, on a par with the 
traditional duties of offering a fair hearing and a wise, impartial 
decision. Many federal district judges have begun to practice and 
advocate increased intervention to shape and delimit the pretrial 
or prehearing process. 

Some federal agencies have begun to make regular use of case 
management processes wherein those who decide cases interject 
their informed judgment and experience early in the pretrial 
stage, and consistently thereafter, to move cases along as quickly 
as possible within the bounds of procedural fairness. One such 
agency is the Department of Health and Human Services ("HHS"), 
whose Departmental Grant Appeals Board ("DGAB" or "Board") 
makes active, planned use of special managerial procedures. The 
Board, which decides cases brought by state and local governments 
or other recipients of HHS grant funds, has a three-tiered process 
that relies extensively on use of action-forcing procedures for 
completing each stage of a case. The Board adjudicates almost all 
its cases- -well over two hundred dispositions and one hundred 



OFFICIAL RECOMMENDATIONS 31 

written decisions annually with an average "amount in controversy" 
in excess of one million dollars — in three to nine months. Most 
disputes before it involve financial issues concerning the 
allowability of grantee expenditures, but the Board's jurisdiction 
extends also to disputes over grant terminations and some 
renewals. A recent study^ indicates that the Board's process 
reduces the opportunity for maneuvering by the parties, facilitates 
an expeditious, inexpensive disposition of all but the most 
complex cases, and is overwhelmingly approved by most attorneys 
who practice before it. 

The Board's success should not be discounted because won in 
an environment unusually favorable to efficient dispute 
resolution. 2 The fact is that similar procedures are now used with 
apparently equal success at other agencies. They merit the 
attention of appeals boards, administrative panels, administrative 
law judges ("ALJs") and all others involved in the decisional 
process. Though recognizing that many factors affect the 
procedures to be followed in any particular dispute, the 
Administrative Conference encourages this trend toward reducing 
the transaction costs of agency proceedings and believes that this 
is a key responsibility of all presiding officers and their 
supervisors. The Conference has, in several contexts, already 
called on federal agencies to make greater use of internal time 
limits,^ alternative means of dispute resolution,^ and case 



1 This recommendation is based largely on the report "Model 
for Case Management: The Grant Appeals Board" by Richard B. 
Cappalli (1986), which explores how the methods described 
separately below interact in an integrated case management system. 

2 E.g., a moderate caseload per judge, a shared program 
objective among all parties and a long-term relationship between 
the agency and the claimant. 

3 Recommendation 78-3 calls on all agencies to use 
particularized deadlines or time limits for the prompt disposition 
of adjudicatory and rulemaking proceedings, either by announcing 
schedules for particular cases or adopting rules with general 
timetables for their various categories of proceedings. Time 
Limits on Agency Actions, 1 CFR § 305.78-3. The Conference has 
also called on agencies to establish productivity norms and 
otherwise exercise their authority to prescribe procedures and 
techniques for accurate, expeditious disposition of Social Security 
claims and disputes under grants. E.g., Procedures for 
Determining Social Security Disability Claims, 1 CFR § 305.78-2; 
Resolving Disputes under Federal Grant Programs, 1 CFR § 
305.82-2. 



32 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

management and other techniques^ to expedite and improve their 
case handling. The Conference now calls upon all personnel who 
conduct or oversee processing of adjudicative proceedings for the 
federal government to make more determined efforts to use the 
kinds of case management methods described below as may be 
appropriate. 



RECOMMENDATION 



The Conference encourages the prompt, efficient and 
inexpensive processing of adjudicative proceedings. Federal 
agencies engaged in formal and informal adjudication should 
consider applying the following case management methods to their 
proceedings, among them the following: 

1. Personnel management devices. Use of internal agency 
guidelines for timely case processing and measurements of the 
quality of work products can maintain high levels of productivity 
and responsibility. If appropriately fashioned, they can do so 



^ Recommendation 86-3 calls on agencies to make greater use 
of mediation, negotiation, minitrials, and other "ADR" methods to 
reduce the delay and contentiousness accompanying many agency 
decisions. Agency Use of Alternative Means of Dispute Resolution^ 
1 CFR § 305.86-3. The Conference has called previously for 
using mediation, negotiation, informal conferences and similar 
innovations to decide certain kinds of disputes more effectively. 
E.g.^ Procedures for Negotiating Proposed Regulations, 1 CFR §§ 
305.82-4, .85-5; Negotiated Cleanup of Hazardous Waste Sites 
Under CERCLA, 1 CFR § 305.84-4; Resolving Disputes under 
Federal Grant Programs, 1 CFR § 305.82-2. 

5 Many of the practices recommended herein reflect the advice 
contained in the Manual for Administrative Law Judges, prepared 
for the Conference by Merritt Ruhlen. Recommendation 73-3 
advises on using case management in adjudicating benefit and 
compensation claims. It calls for continuous evaluation of 
adjudicative performance pursuant to standards for measuring the 
accuracy, timeliness and fairness of agency procedures. Quality 
Assurance Systems in the Adjudication of Claims of Entitlement to 
Benefits or Compensation, 1 CFR § 305.73-3. In addition. 
Recommendation 69-6 urges agencies to compile and use statistical 
caseload data about their proceedings. Compilation of Statistics on 
Administrative Proceedings by Federal Department and Agencies, 1 
CFR § 305.69-6. 



OFFICIAL RECOMMENDATIONS 33 

without compromising independence of judgment. Agencies 
possess and should exercise the authority, consistent with the 
ALJ's or other presiding officer's decisional independence, to 
formulate written criteria for measuring case handling efficiency, 
prescribe procedures, and develop techniques for the expeditious 
and accurate disposition of cases. The experiences and opinions of 
presiding officers should play a large part in shaping these criteria 
and procedures. The criteria should take into account differences 
in categories of cases assigned to judges and in types of 
disposition (e.g., dismissals, dispositions with and without hearing). 
Where feasible, regular, computerized case status reports and 
supervision by higher level personnel should be used in furthering 
the systematic application of the criteria once they have been 
formulated. 

2. Step-by- step time goals. Case management by presiding 
officers and their supervisors should be combined with procedures 
designed to move cases promptly through each step in the 
proceeding. These include (a) a program of step-by-step time 
goals for the main stages of a proceeding, (b) a monitoring system 
that pinpoints problem cases, and (c; a management committed to 
expeditious processing. Time guidelines should be fixed in all 
cases for all decisional levels within the agency, largely with the 
input of presiding officers and others affected. While the 
guidelines should be flexible enough to accommodate exceptional 
cases and should maintain their non-obligatory nature, they should 
be sufficiently fixed to keep routine items moving and ensure that 
any delays are justified. Agencies should encourage a 
management commitment by including specific goals or duties of 
timely case processing in pertinent job descriptions. 

3. Expedited options. Agencies should develop, and in some 
instances require parties to use, special expedited procedures. 
Different rules may need to be developed for handling small cases 
as well as for larger ones that do not raise complex legal or factual 
issues. 

4. Case file system. 

(a) Agencies should develop procedures to ensure early 
compilation of relevant documents in a case file. This will help 
the presiding officer delineate the legal and factual issues, the 
parties' positions and the basis for the action as promptly as 
possible. The presiding officer may then structure the process 
suitably and issue preliminary management directives. 



34 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

(b) Disputes preceded by party interactions or investigations 
which create a substantial factual record, as in most contract and 
grant disputes, are especially amenable to this approach. Cases 
involving strong fact conflicts or in which data are peculiarly 
within the possession of one party who has motivations to suppress 
them may be less suitable for a case file system. 

5. Two stage resolution approaches. In proceedings where the 
case file system is less appropriate, as where factual conflicts 
render discovery important, agencies should consider using a two- 
phase procedure. 

(a) Phase one might be an abbreviated discovery phase 
directed by a responsible official, with the product of that 
discovery forming the "appeal file" for the next phase. 
Alternatively, parties could be channeled into a private dispute 
resolution mode, such as mediation, negotiation or arbitration, 
which, even if unsuccessful, can serve to define major issues and 
to advance development of the record. Before employing this 
alternative, agencies would have to determine whether the 
confidentiality rule that normally attaches to arbitration, mediation 
and negotiation is so critical that it cannot be abandoned for the 
sake of a more efficient second stage. 

(b) A second stage, if necessary, should proceed under active 
case management, as recommended. 

6. Seeking party concessions and offering mediation. 

Presiding officers should promote party agreement and concessions 
on procedural and substantive issues, as well as on matters 
involving facts and documents, to reduce hearing time and 
sometimes avoid hearings altogether. Agencies should also (a) 
encourage decisional officers to resolve cases (or parts thereof) 
informally, (b) provide their officers training in mediation and 
other ADR methods, and (c) routinely offer parties the services of 
trained mediators. 

7. Questioning techniques. 

(a) Requests for clarification or development of record. If a 
party makes a statement in a notice of appeal, brief, or other 
submission which a presiding officer does not understand, doubts, 
or wishes clarified, the officer should consider requiring the party 
to expand upon its position. The ambiguity may relate to a 
factual matter, or an interpretation of a legal precedent or a 
document. Similarly, by preliminary study of the case file, the 



OFHCIAL RECOMMENDATIONS 35 

presiding officer could identify missing information and require 
the party with access to such information to remedy the 
deficiency. The officer could also issue "invitations to brief" 
difficult questions of statutory interpretation or the like. 

(b) Written questions for conference or hearing. The 
presiding officer should manage cases so as to limit issues, proof, 
and argument to core matters. Having ascertained the factual and 
legal ambiguities in each side's case by careful study of the briefs 
and documentation submitted, the presiding officer should 
structure a prehearing conference or hearing as a forum for 
addressing these ambiguities by seeking responses to carefully 
formulated questions and providing appropriate opportunity for 
rebuttal. In this way, and by otherwise seeking to identify the 
specific questions in dispute early on, the presiding officer would 
focus parties' attention on key issues and deflect unproductive 
procedural maneuvers. 

8. Time extension practices. Time extensions should be 
granted only upon strong, documented justification. While 
procedural fairness mandates that deadlines may be extended for 
good cause, presiding officers should be aware that casual, 
customary extensions have serious negative effects on an 
adjudicatory system, its participants, and those wishing access 
thereto. Stern warnings accompanying justified extensions have 
had good success in curtailing lawyers' requests for additional 
time. 

9. Joint consideration of cases with common issues. 

Whenever practicable and fair, cases involving common questions 
of law or fact should be consolidated and heard jointly. 
Consolidation could include unification of schedules, briefs, case 
files and hearings. 

10. Use of telephone conferences and hearings. Presiding 
officers should take full advantage of telephone conferences as a 
means to hear motions, to hold prehearing conferences, and even 
to hear the merits of administrative proceedings where 
appropriate. While telephone conferences may be either employed 
regularly for handling selected matters or limited to a case-by- 
case basis at the suggestion of the presiding officer or counsel, 
experience suggests that maximum benefits are derived when 
telephone conferences are made presumptive for certain matters. 

11. Intra-agency review. Any subsequent intra-agency 
review of an initial adjudicative decision should generally be 



36 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

conducted promptly pursuant to flexible, preestablished time 
guidelines and review standards. 

12. Training. Agencies should offer, and presiding officers 
seek, training in case management, mediation, negotiation and 
similar methods, and should be alert to take advantage of them. 
The training should be carried out with the advice and aid of 
other federal agencies and groups with expertise. 



OFHCIAL RECOMMENDATIONS 37 

RECOMMENDATION 86-8: 

ACQUIRING THE SERVICES OF "NEUTRALS" FOR 

ALTERNATIVE MEANS OF DISPUTE RESOLUTION 



The Administrative Conference has repeatedly encouraged 
agencies to take advantage of mediation, negotiation, minitrials, 
binding arbitration and other alternative means of dispute 
resolution ("ADR").^ While some agencies have begun to employ 
these methods to reduce transaction costs and reach better results, 
many disputes are still being resolved with unnecessary formality, 
contentiousness and delay. This recommendation is aimed at 
helping agencies begin to explore specific avenues to expand their 
use of ADR services. 

A key figure in the effective working of various modes of 
ADR, including negotiated rulemaking, is the "neutral" — a person, 
usually serving at the will of the parties, who generally presides 
and seeks to help the parties reach a resolution of their dispute. 



^ In Recommendation 86-3, the Conference called on agencies, 
where not inconsistent with statutory authority, to adopt 
alternatives to litigation and trial-type hearings such as mediation, 
minitrials, arbitration and other "ADR" methods. Agencies' Use of 
Alternative Means of Dispute Resolution, 1 CFR § 305.86-3. In 
the rulemaking sphere. Recommendations 82-4 and 85-5 have 
been instrumental in promoting agency experimentation with 
negotiated rulemaking, which involves convening potentially 
interested parties to negotiate the details of a proposed rule. 
Procedures for Negotiating Proposed Regulations, 1 CFR 
§§ 305.82-4 and .85-5. See also. Negotiated Cleanup of 
Hazardous Waste Sites Under CERCLA, 1 CFR § 305.84-4; 
Resolving Disputes Under Federal Grant Programs, 1 CFR 
§ 305.82-2; and Case Management as a Tool for Improving Agency 
Adjudication, 1 CFR § 305.86-7. 



38 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

These neutrals, often highly skilled professionals with considerable 
training in techniques of dispute resolution, can be crucial to 
using ADR methods with success. ^ For agencies to use ADR 
effectively, they should take steps to develop routines for deciding 
when and how these persons can be employed, to identify 
qualified neutrals, and to acquire their services. 

The diversity of roles played by neutrals and the uncertainty 
as to certain applicable legal requirements present complications 
for agencies considering uses of ADR. Neutrals may be specially 
trained and accredited, or may simply hold themselves out as 
having certain expertise, experience or credibility. They may be 
called on to make binding decisions, consistent with applicable 
statutory and regulatory requirements, when opposing positions 
cannot be reconciled, or they may simply render advice to the 
parties. Time may be of the essence in acquiring their services, as 
in many arbitrations, but in some instances may be a minor 
consideration. Costs of using outside neutrals may range from a 
few thousand dollars (for the services of a minitrial advisor) to 
six figures (for convening and facilitating a large-scale negotiated 
rulemaking). These differences render specific advice difficult to 
give in advance. Agencies, Congress, courts, and others who 
employ ADR methods or review their use should nonetheless 
observe certain guidelines intended to accomplish the following 
goals: 

■ Supply. Broadening the base of qualified, acceptable 
individuals or organizations, inside and outside the government, to 
provide ADR services. 

■ Qualifications. Insuring that neutrals have adequate skills, 
technical expertise, experience or other competence necessary to 
promote settlement, while avoiding being too exclusive in the 
selection process. 

■ Acquisition. Identifying existing methods, or developing 
new techniques, for expeditiously acquiring the services of 
neutrals at a reasonable cost and in a manner which (a) insures a 
full and open opportunity to compete and (b) enables agencies to 
select the most qualified person to serve as a neutral, given that 
the protracted nature of the government procurement process is 



2 See the Glossary in the Appendix for brief descriptions of 
the roles of neutrals in various proceedings. 



OFFICIAL RECOMMENDATIONS 39 

often inconsistent with the goals of ADR and the need to avoid 
delays.^ 

■ Authority. Minimizing any uncertainty under the 
"delegation" doctrine or similar theories that may adversely affect 
the authority of some neutrals to render a binding decision. This 
consideration, however, should not prove troublesome where 
neutrals merely aid the parties in reaching agreement (as in nearly 
all mediations, minitrials and negotiated rulemakings). 

These proposals are intended to help agencies meet the 
challenge of reaching these goals in a time of reduced resources 
and in a milieu in which many affected interests may oppose 
change. 

RECOMMENDATION 
A. Availability and Qualifications of Neutrals 

1. Agencies and reviewing bodies should pursue policies that 
will lead to an expanded, diverse supply of available neutrals, 
recognizing that the skills required to perform the services of a 
dispute resolution neutral will vary greatly depending on the 
nature and complexity of the issues, the ADR method employed, 
and the importance of the dispute. Agencies should avoid unduly 
limiting the pool of acceptable individuals through the use of 
overly restrictive qualification requirements, particularly once 
agencies have begun to make more regular use of ADR methods. 
While skill or experience in the process of resolving disputes, such 
as that possessed by mediators and arbitrators, is usually an 
important criterion in the selection of neutrals, and knowledge of 
the applicable statutory and regulatory schemes may at times be 
important, other specific qualifications should be required only 
when necessary for resolution of the dispute. For example: 



3 While there may be situations in which agencies can obtain 
the services of a qualified outside neutral without following 
formal procurement procedures, acquisitions of neutrals' services 
are generally governed by the Competition in Contracting Act, 
Pub. L. No. 98-369, Title VII, 98 Stat. 1175, which mandates full 
and open competition for contracts to supply goods and services to 
the federal government, and the Federal Acquisition Regulation, 
48 CFR Chapter 1, Parts 1-53, which sets forth detailed 
procedures for conducting competitive procurements. 



40 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

(a) Agencies should not necessarily disqualify persons who 
have mediation, arbitration or judicial experience but no specific 
experience in the particular ADR process being pursued. 

(b) While agencies should be careful not to select neutrals who 
have a personal or financial interest in the outcome, insisting upon 
"absolute neutrality"--^.g., no prior affiliation with either the 
agency or the private industry involved--may unduly restrict the 
pool of available neutrals, particularly where the neutral neither 
renders a decision nor gives formal advice as to the outcome. 

(c) Agencies should insist upon technical expertise in the 
substantive issues underlying the dispute or negotiated rulemaking 
only when the technical issues are so complex that the neutral 
could not effectively understand and communicate the parties' 
positions without it. 

2. Agencies should take advantage of opportunities to make 
use of government personnel as neutrals in resolving disputes. 
These persons may include agency officials not otherwise involved 
in the dispute or employees from other agencies with appropriate 
skills, administrative law judges, members of boards of contract 
appeals, and other responsible officials. The Administrative 
Conference, Federal Mediation and Conciliation Service ("FMCS"), 
the Department of Justice (particularly the Community Relations 
Service ("CRS")) and other interested agencies should work to 
encourage imaginative efforts at sharing the services of federal 
"neutrals," to remove obstacles to such sharing, and to increase 
parties' confidence in the selection process. 

3. Congress should consider providing FMCS, CRS and other 
appropriate agencies with funding to train their own and other 
agencies' personnel in the particular skills needed to serve in 
minitrials, negotiated rulemakings, and other ADR proceedings. 

4. The Administrative Conference, in consultation with 
FMCS, should assist other agencies in identifying neutrals and 
acquiring their services and in establishing rosters of neutral 
advisors, arbitrators, convenors, facilitators, mediators and other 
experts on which federal agencies could draw when they wished. 
The rosters should be based, insofar as possible, on full disclosure 
of relevant criteria (education, experience, skills, possible bias, 
and the like) rather than on strict requirements of actual ADR 
experience or professional certification. Agencies should also 
consider using rosters of private groups {e.g., the American 
Arbitration Association). The Conference, FMCS or another 



OFFICIAL RECOMMENDATIONS 41 

information center should routinely compile data identifying 
disputes or rulemakings in which neutrals have participated so 
that agencies and parties in future proceedings can be directed to 
sources of information pertinent to their selection of neutrals. 

5. Agencies should take advantage of opportunities to expose 
their employees to ADR proceedings for training purposes, and 
otherwise encourage their employees to acquire ADR skills. 
Employees trained in ADR should be listed on the rosters 
described above, and their services made available to other 
agencies. 



B. Acquiring Outside Neutrals' Services 

1. In situations where it is necessary or desirable to acquire 
dispute resolution services from outside the government, agencies 
should explore the following methods: 

(a) When authorized to employ consultants or experts on a 
temporary basis (e.g., 5 U.S.C. § 3109), agencies should consider 
utilizing that authorization in furtherance of their ADR or 
negotiated rulemaking endeavors. 

(b) Agencies contemplating ADR or negotiated rulemaking 
projects involving private neutrals should, as part of their 
acquisition planning process pursuant to the Federal Acquisition 
Regulation ("FAR") Part 7,^ periodically give notice in the 
Commerce Business Daily and in professional publications of their 
needs and intentions, ^ so as to allow interested organizations and 
individual ADR neutrals to inform the agency of their interest and 
qualifications. 

(c) Where speed is important and the amount of the contract 
is expected to be less than $25,000, agencies should use the 
streamlined small purchase procedures of Subpart 13.1 of the 



4 48 CFR Part 7. 

5 Agencies are required to give Commerce Business Daily notice 
for all contract solicitations in which the government's share is 
likely to exceed $10,000. 15 U.S.C. § 637(e); 48 CFR § 5.201(a). 
For procurements between $10,000 and $25,000 in which the 
agency reasonably expects to receive at least two offers, no such 
notice is required. Pub. L. No. 99-591, October 18, 1986, Title 
IX, Section 922. 



42 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

Federal Acquisition Regulation^ in acquiring the services of 
outside neutrals, particularly minitrial neutral advisors, mediators 
and arbitrators. 

(d) Agencies that foresee the need to hire private neutrals for 
numerous proceedings should consider the use of indefinite 
quantity contracts as vehicles for identifying and competitively 
acquiring the services of interested and qualified neutrals who can 
then be engaged on an expedited basis as the need arises. 
Agencies should, where possible, seek contracts with more than 
one supplier. In fashioning such indefinite quantity contracts, 
agencies should take care to comply with the following: 

(1) Agency contracts should specify a minimum 
quantity, which could be a non-nominal dollar amount 
rather than a minimum quantity of services.*^ 

(2) Negotiation of individual orders under the contract 
is desirable, but should generally adhere to the personnel, 
statements of work, and cost rates or ceilings set forth in 
the basic indefinite quantity contract, so as to minimize 
"sole source" issues. 

(e) Agencies should also consider: 

(1) Entering into joint projects for acquiring neutrals' 
services by using other agencies' contractual vehicles. 

(2) Using other contracting techniques, such as basic 
ordering agreements and schedule contracts, where 
appropriate to meet their needs for neutrals' services. 

(3) Proposing a deviation from the FAR or amending 
their FAR supplements, where appropriate. 

(f) Agencies should evaluate contract proposals for ADR 
neutrals' services on the qualifications of the offeror, but cost 
alone should not be the controlling factor.^ 



6 48 CFR Subpart 13.1. This Subpart allows agencies to make 
purchases in amounts less than $25,000 without following all of 
the formalities prescribed in the FAR for ordinary procurements. 
If the procurement is for less than $10,000, the agency need not 
advertise it in advance in the Commerce Business Daily. 48 CFR 
§ 5.201(a). None of these provisions relieves the agency of its 
mandate to obtain competition. 

7 48 CFR § 16.504(a)(2). 

8 4a CFR § 15.605(c). 



OFFICIAL RECOMMENDATIONS 43 

2. The Civilian Agency Acquisition Council and Defense 
Acquisition Regulatory Council should be receptive to agency or 
Administrative Conference proposals for deviations from,^ or 
amendments to, the FAR to adapt procurement procedures to the 
unique requirements of ADR processes, consistent with statutory 
mandates. 

3. In the absence of appropriate considerations suggesting a 
different allocation of costs, in minitrials and arbitration the 
parties customarily should share equally in the costs of the 
neutrals' services. 



Glossary 



Mediator. A mediator is a neutral third party who attempts 
to assist parties in negotiating the substance of a settlement. A 
mediator has no authority to make any decisions that are binding 
on either party. 

Convenor /Facilitator. Negotiated rulemakings generally 
proceed in two phases, one using a "convenor" and the other a 
"facilitator." In the first (convening) phase, a neutral called a 
convenor studies the regulatory issues, attempts to identify the 
potentially affected interests, and then advises the agency 
concerning the feasibility of convening representatives of these 
interests to negotiate a proposed rule. If the agency decides to go 
forward with negotiating sessions, the convenor assists in bringing 
the parties together. In the second (negotiating) phase, a neutral 
called a facilitator manages the meetings and coordinates 
discussions among the parties. When the parties request, a 
facilitator may act as a mediator, assisting the negotiators to reach 
consensus on the substance of a proposed rule. The roles of 
convenor and facilitator sometimes overlap, and often both 
functions are performed by the same person or persons. Neither a 
convenor nor a facilitator has authority to make decisions that are 
binding on the agency or on the participating outside parties. 

Neutral Advisor. A minitrial is a structured settlement process 
in which each party to a dispute presents a highly abbreviated 
summary of its case before senior officials of each party 
authorized to settle the case. In this recommendation, it is 



9 48 CFR § 1.402, 



44 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

presumed that the government is one party to the dispute. In 
some (but not all) minitrials, a neutral advisor participates by 
hearing the presentations of the parties and, optionally, providing 
further assistance in any subsequent attempt to reach a settlement. 
Typically, a neutral advisor is an individual selected by the 
parties. Duties of a neutral advisor may include presiding at the 
presentation, questioning witnesses, mediating settlement 
negotiations, and rendering an advisory opinion to the parties. In 
no event does a neutral advisor render a decision that is binding 
on any party to a minitrial. 

Arbitrator. An arbitrator is a neutral third party who issues a 
decision on the issues in dispute after receiving evidence and 
hearing argument from the parties. Arbitration is a less formal 
alternative to adjudication or litigation, and an arbitrator's 
decision may or may not be binding. Arbitration may be chosen 
voluntarily by the parties, or it may be required by contract or 
statute as the exclusive dispute resolution mechanism. 



BACKGROUND REPORTS 

FOR 

RECOMMENDATIONS 

86-1 THROUGH 86-8 



BACKGROUND REPORT FOR RECOMMENDATION 86-1 



NONLAWYER ASSISTANCE TO INDIVIDUALS IN FEDERAL MASS JUSTICE 
AGENCIES: THE NEED FOR IMPROVED GUIDELINES 



Zona Fairbanks Hosteller 
Attorney at Law 
Washington, DC 



Report to the Administrative Conference of the United States 
June 1, 1986 



48 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 



TABLE OF CONTENTS 



I . Summary 

II. Large Numbers of Individuals Involved in Federal 
Mass Justice Agency Proceedings Have Unmet Needs 
for Assistance 

III. Nonlawyer Professionals Currently Meet Many of the 

Needs for Assistance of Individuals Involved in Mass 
Justice Agency Proceedings and as a Class are 
Competent to Do So 

IV. Federal Mass Justice Agencies Have Authority to 
Authorize Nonlawyer Assistance in Administrative 
Proceedings 

V. Federal Law and Mass Justice Agency Regulations 
Do Not Maximize the Potential for Increased 
Nonlawyer Professional Assistance Because They Do 
Not Adequately Protect Nonlawyer Professionals from 
State Unauthorized Practice Laws 

VI. Federal Mass Justice Agency Authorization for 

Increased Nonlawyer Professional Assistance Can Be 
Accomplished in a Manner That is Consistent With 
Agency Needs to Regulate Competence and Ethical 
Conduct of Practitioners 

VII. Conclusion 



NONLAWYER ASSISTANCE 49 

I. Summary 



At the request of the Administrative Conference of the United States 
(ACUS), a study was undertaken of so-called "mass justice" agencies - that 
is, agencies having a high volume of individual and family claims, 
applications or disputes. The purpose of the study was to make findings and 
recommendations with respect to mass justice agencies on the following 
matters: 

1. To what extent individuals are not assisted or represented by 
anyone (exclusive of agency personnel) and the resulting 
ramifications for efficient and fair agency process; 

2. To what extent individuals are assisted or represented by 
nonlawyers and to what extent by lawyers; the skills, training and 
experience each group is required by agency rules to have and in 
fact possesses; the functions each group performs; and the 
differing results, if any. 

3. To what extent agency rules encourage or discourage nonlawyer 
assistance and representation and what the justifications are for 
such rules. 

A. To what extent federal and state laws or professional codes of 
ethics encourage or discourage nonlawyer assistance and 
representation to those involved in federal agency proceedings, 
and the underlying rationale for them. 

Two mass justice agencies were selected for intensive study: The 
Social Security Administration and the Immigration and Naturalization 
Service. In addition, relevant procedures of the Veterans Administration 
and the Internal Revenue Service were also examined for comparison 
purposes.^ Interviews of participants in federal agency proceedings were 
largely conducted in the ten-month period between May 1, 1985 and February 
28, 1986. These included interviews of federal agency officials as well as 
interviews with a nxunber of private nonprofit legal aid and social services 



1 Although the focus of this study is mass justice agencies, reference 
has also been made as appropriate to existing literature on nonlawyer 
assistance in non-mass justice agency proceedings (such as Professor 
Jonathan Rose's unpublished study for ACUS on economic regulatory 
proceedings entitled Representation by Nonlawyers in Federal Administration 
Agency Proceedings: An Expanded Role , submitted to ACUS April 9, 1984). 



50 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

agencies which, directly or indirectly, provide lawyer and nonlawyer 
professional assistance in mass justice agency proceedings.^ 

A considerable amount of material bearing on the subject of this 
study has been published in the past. In order not to duplicate past 
effort, this study has collated and drawn extensively upon the 
investigations of others, most notably, the survey of federal agencies 
published in February, 1985 by the American Bar Association's Standing 
Committee on Lawyers' Responsibility for Client Protection and The 
American Bar Association Center for Professional Responsibility. A copy of 
the American Bar Association report is attached to this draft as Appendix A. 

This study has resulted in the following findings and conclusions: 

(1) A large number of individuals involved in federal mass justice 
agency proceedings have unmet needs for assistance at all levels of agency 
process, but particularly assistance with filling out forms and attending 
informal interviews and conferences prior to any formal proceeding where a 
formal appearance of counsel or representative is made. From an agency 
point of view, persons who are unassisted at the early stages are more 
likely than not to cause a loss of agency efficiency because they are likely 
to require more time, effort and help on the part of the agency's staff than 
those who are otherwise assisted. The existing pool of lawyers is 
inadequate to meet either all the early stage needs for assistance or the 
later stage needs for representation of low and moderate income persons. 
The absence of adequate assistance and representation resources is 



2 Interviews were conducted with the directors and a cross section of 
nonlawyer professional staff members of the following private non-profit 
organizations: AYUDA; Alien Rights Project of the Washington Lawyers' 
Committee; Migrant Legal Action Project; American Association of Retired 
Persons' Legal Counsel for the Elderly Department; National Senior Citizens 
Law Center; National Council for Senior Citizens; George Washington Law 
School Paralegal Institute for Seniors; George Washington Law School clinics 
on disability benefits and immigration matters; Neighborhood Legal Services 
Program; The Legal Aid Society; Family and Child Services; lona House; 
Antioch Law School clinics on paralegal advocacy, government benefits, and 
immigration matters; Women's Legal Defense Fund; Catholic University legal 
services clinic; District of Columbia Citizens Complaint Center; National 
Paralegal Association (volunteer program); Pro bono Coordinator's office of 
the D.C. Bar; Lawyer Referral and Information Service of the D.C. Bar; 
Disabled American Veterans; American University Law School Clinic on 
Veterans Laws; National Organization of Social Security Claimants' 
Representatives . 

Assistance in collecting statistical and other agency data and in 
interviewing participants in federal agency proceedings was provided by 
Majel Stein, who was a law student at the time at George Mason Law School 
and is currently a law student at the University of Virginia Law School. 



I 



I 



NONLAWYER ASSISTANCE 51 

particularly acute for working poor and moderate income persons who 
ordinarily do not qualify for free assistance from legal aid organizations, 
and who are frequently unable to afford the prevailing market fees of 
lawyers . 

(2) Statistical evidence indicates that in agency hearings 
unrepresented persons are less likely to obtain favorable decisions than 
those who are represented. Those individuals in mass justice agency 
hearings who are currently represented by nonlawyers achieve results only 
slightly less favorable than those achieved by individuals who are 
represented by lawyers, and they achieve results which are significantly 
more favorable to them than those individuals who are completely 
unrepresented. This evidence, together with subjective opinion evidence 
that in mass justice agency proceedings nonlawyers generally perform the 
same functions at many levels of the agency process as lawyers, and perform 
them well, leads to the conclusion that nonlawyer professionals as a class 
are able to provide competent assistance to individuals at many levels of 
mass justice agency proceedings. 

(3) Mass justice agency regulations and practice do not entirely 
prohibit nonlawyer assistance, but neither do they encourage nonlawyer 
assistance as much as they might, consistent, of course, with legitimate 
agency interests in regulating the qualifications and ethical conduct of 
agency practitioners. In some agencies, nonlawyer assistance is encouraged 
only when it is provided free of charge (usually to relatives, friends, or 
poor persons). These agencies fail to maximize the potential for increased 
nonlawyer professional assistance to working poor and moderate income 
persons who can afford to pay modest fees because they fail to provide 
nonlawyer professionals with adequate protection from prosecution under 
state unauthorized practice laws. State unauthorized practice laws, and the 
fear of prosecution under those laws, were found by this study to be the 
single most chilling deterrent to the development of an increased pool of 
nonlawyer professionals to assist moderate income individuals involved in 
mass justice agency proceedings. 

While nonlawyer professionals who provide assistance for fee to 
moderate income persons are adequately protected against state prosecution 
for unauthorized practice under the regulations of some agencies (the 
Internal Revenue Service, for example) they are not protected at all under 
other agency regulations (for example, those of the Immigration and 
Naturalization Service). In addition, even when agency regulations permit 
nonlawyer practice for a fee (as do those of the Social Security 
Administration) the long history of unauthorized practice enforcement in the 
states, and the uncertainty about the federal government's policy towards 
that enforcement, has acted as a practical deterrent to the development of 
nonlawyer professional practice. 

(A) Under the federal preemption doctrine articulated by the Supreme 
Court in Sperry v. Florida ex rel Florida Bar , 373 U.S. 379 (1963), 
nonlawyers can be protected from prosecution under state unauthorized 



52 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

practice laws for their federal agency practice activity, but only if agency 
regulations unambiguously authorize the activity to be carried on in the 
respective states. This federal preemptive protection is particularly 
needed for those nonlawyer professionals who are, or might be, willing to 
provide assistance for fee to moderate income persons. 

(5) Individual mass justice agencies probably have implied authority 
to issue regulations authorizing increased nonlawyer representation. Even 
if they do not have implied authority, it is probable that Section 555(b) of 
the Administrative Procedure Act provides sufficient legislative authority 
for agencies to authorize increased nonlawyer representation. However, 
given the uncertainty and fears about the enforcement of state unauthorized 
practice laws, and the fact that Section 555(b) is not crystal clear 
facially, it may be prudent and useful to amend the language of Section 
555(b) itself to emphasize that nonlawyer agency practice is authorized 
under the Administrative Procedure Act. It may also be helpful to amend 
Section 555(b) to make it unambiguously clear that those nonlawyers who are 
admitted to practice by an agency are authorized to do all that is necessary 
and incidental to that practice in their respective states. 

(6) Federal mass justice agencies currently utilize a range of 
admission criteria and other measures to ensure that individual nonlawyer 
practitioners meet agency standards of competence at various stages of 
agency process according to the particular objectives and needs of the 
respective agencies. These mechanisms are generally workable and should be 
left, as they now are, to individual agency determination, according to each 
agency's own particular objectives and needs. Agencies should be urged, 
however, to review their regulations governing competence towards the goal 
of increasing the pool of nonlawyer representatives who can competently 
provide assistance at all levels of agency proceeding where nonlawyer 
assistance is determined by an agency to be feasible. 

(7) Agencies should review their rules of practice that deal with 
attorney misconduct (such as those dealing with negligence, fee gouging, 
fraud, misrepresentation and representation when there is a conflict of 
interest) to ensure that similar rules are made applicable to nonlawyers. 
In addition, agencies should ensure that effective agencies procedures are 
established for adequate enforcement of those rules of practice including 
agency procedures for receiving complaints from the public. 



NONLAWYER ASSISTANCE 53 

TI. Large Numbers of Individuals Involved in Federal Mass Justice 
Agency Proceedings Have Unmet Needs for Assistance 

The principal engagement between an ordinary citizen and a federal 
agency concerning a claim, application or dispute is most likely to occur in 
a mass justice agency. From the viewpoint of the ordinary citizen or 
resident seeking disability or retirement benefits, adjustment of alien 
status to citizenship, or refund of taxes, each mass justice agency decision 
affecting his claim or dispute is of great personal importance. And from 
the individual's point of view, assistance from knowledgeable sources in 
presenting the claim or application, or pressing the individual's side of 
the dispute, may also be of great importance. In fact, there is statistical 
evidence that represented individuals in mass justice agency proceedings are 
more likely to prevail than unrepresented ones.-* 



^ For a statistical study concluding that represented individuals are 
more likely to prevail than unrepresented ones in informal nonadversarial 
proceedings of agencies dispensing disability benefits, and for a discussion 
of some of the costs and benefits of providing that representation, see 
Popkin, The Effect of Representation in Nonadversary Proceedings - A Study 
of Three Disability Programs . 62 Cornell L.Rev. 990 (1977) (This 1977 study 
found, for example, that in Federal Employees' Compensation Act proceedings, 
represented claimants had an advantage of up to 28% at the hearing stage.) 

More recent statistical data compiled by the Social Security 
Administration reveals that in fiscal year 1983, unrepresented persons 
prevailed in IA.4% fewer request for hearing matters than those who were 
represented. See Office of Hearing Appeals' survey: Participant 
Involvement in Request for Hearing Cases For Fiscal Year 1983 , May 1984, 
attached to this paper as Appendix B, and discussion of that survey, in the 
text at note 42, infra . 

Veterans Administration data also reveals that unrepresented persons 
are slightly less likely to prevail before the Board of Veterans Appeals 
than those, represented by attorneys or nonprofit service organizations which 
prevail in 3% to 1.5% more matters respectively. These Veterans 
Administration statistics are cited in the Supreme Court's decision in 
Walters v. National Association of Radiation Survivors , 105 S.Ct. 3180, 3193 
(1985). (Win rates before the Veterans Board of Appeals by any category of 
representative are significantly lower than those before review boards of 
other agencies, ranging only between 15% and 18%. By statute, there is no 
judicial review of Veterans Board decisions.) 

By statute, no one may charge veterans a fee of more than $10 in 
disability benefit proceedings. 32 U.S.C. 3404(C). The Walters case, id., 
involved a challenge to the $10 fee cap on the ground that the cap 
effectively precluded availability of lawyers to provide representation as a 



54 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

At the same time, from the viewpoint of government policymakers, the 
federal mass justice agency decision system is on overload, and there seems 
to be no end in sight to the ever mounting numbers. The Social Security 
Administration, for example, in fiscal year 1983 experienced a 13% caseload 
increase over fiscal year 1982 at all levels of hearings and appeals, 
resulting in a total of 362,223 requests for hearings. Federal court 
litigation also increased by 97% over the previous year as 23,690 new cases 
were filed. (Disability litigation comprised 98% of the new litigation.) 
Non-litigated applications for social security benefits have also increased 
as several hundred thousand new beneficiaries have been added to the rolls, 
bringing the total beneficiaries from 35.6 million in 1982 to an estimated 
36.3 million in 1984.^ The Veterans Administration decides approximately 



practical matter and was, therefore, unconstitutional. The court upheld the 
fee limitation because it found that the record did not demonstrate that 
veterans were harmed by nonlawyer representation in administrative agency 
proceedings before the Veterans Administration. Justice Stevens dissented 
and argued that whether or not lawyers would be more successful in those 
proceedings, the fee limitation interfered with the free choice of 
representative, and that that interference was both harmful and an 
unconstitutional infringement of individual liberty. 

The Immigration and Naturalization Service does not maintain records 
concerning representation in INS proceedings. Knowledgeable persons in non- 
profit agencies serving aliens stated that it was their experience that 
represented persons more often prevailed than those who were unrepresented. 
(See note 2 supra for a list of agencies surveyed.) 

Unrepresented litigants are also less likely to prevail in judicial 
proceedings. A study of 87 "conventional" civil actions filed by indigents 
in the United States District Court for the District of Columbia between 
1960 and 196A showed that those indigent civil plaintiffs who represented 
themselves were twice as unlikely than represented indigents to survive a 
motion to dismiss on the pleadings and almost nine times less able to 
achieve a settlement. Moreover, these pro se plaintiffs had no chance of 
obtaining discovery and were not among the four plaintiffs who reached a 
trial on the merits. See Schmertz, The Indigent Civil Plaintiff in the 
District of Columbia; Facts and Commentary , 27 FED. B.J. 235, 2A1-43 
(1967). Another four-city study found that civil defendants represented by 
counsel are almost six times more likely to succeed than those unable to 
obtain counsel. See Johnson, Thrown to the Lions, A Plea for a 
Constitutional Right to Counsel for Low-Income Civil Litigants , A Bar Leader 
17 (ABA 1978). 



^ Department of Health and Human Services, Social Security 
Administration, Social Security Administration 198A Annual Report to 
Congress at 15, 33, A8-A9. 



NONLAWYER ASSISTANCE 55 

800,000 claims a year for service-connected disability benefits and pension 
claims, and about 66,000 of the claims which are denied are contested in 
administrative proceedings.^ The 1983 Annual Report of the Attorney General 
states that 223,000 petitions for adjustment of status were considered, and 
the Service reported an annual caseload of 90,000 litigated matters, from 
administrative reviews through the federal court system." 

Given the size of mass justice agency caseloads, and the widely 
varying factual circumstances presented in the cases, it is, of course, 
exceedingly difficult for agencies to reach uniformly accurate and fair 
decisions at all stages. Errors will inevitably occur, often requiring 
under our present system not only administrative corrections, amendments and 
appeals, but also judicial review. Moreover, in some areas - disability 
claims, for example -the facts may change many times, thus necessitating new 
claims and reviews for each change in circxamstance. ' 

Sources of knowledgeable assistance for the individuals involved in 
mass justice agency proceedings can make the correction process more 
efficient and fairer for both individuals and agencies. In this connection, 
it should be noted that individuals dealing with federal mass justice 
agencies need help both at the very early, nonadversarial, stages of agency 
process when information is collected, forms are filled out, and questions 
answered, and also at subsequent more formal hearing and adversarial stages. 
In fact, it was the consensus of those interviewed (see note 2, supra ) that 
the greatest volume of need is in the early stages, well before there is any 
requirement for formal appearance of counsel or representative. There was 
also general agreement that if an individual presenting a claim or 
application has competent assistance at the outset, even before forms are 
submitted, the amount of agency time required to consider it can be reduced 
considerably. Ascertaining and resolving factual issues is the major part 
of a mass justice agency's workload, and when the individual has the benefit 
of knowledgeable assistance in presenting the facts clearly and in a format 
that is familiar to the agency, the administrative process is accelerated 
and the decision-maker helped to reach a correct decision initially. A 
clearer record is also established for any administrative review that does 



Data contained in the 1978 report of the Legal Services Corporation 
and introduced into the record of Walters v. National Association of 
Radiation Survivors , supra , at 3183, the Court noting that evidence before 
the Court indicated that the figures remain fairly constant from year to 
year. 

^ Annual Report of the Attorney General (1983), 157. 

For a critical view of this multiplicity of review and expression of 
alarm over "astronomical" caseloads in social security disability 
proceedings, see Dixon, The Welfare State and Mass Justice; A Warning From 
the Social Security Disability Program . 1972 Duke L.J. 681 (1972). 



56 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

ensue, thus making it easier for the administrative reviewer to determine 
speedily the correctness of the initial decision. 

Almost 25 years ago, Allanson Willcox, General Counsel of what was 
then the Department of Health, Education and Welfare, acknowledged the 
efficacy of legal representation in administrative process generally when he 
addressed the 1963 annual meeting of the Virginia State Bar Association. He 
candidly stated: 

The fact that a citizen can retain (a lawyer) to represent him 
goes a long way towards assuring that he will receive the 
treatment to which he is entitled at the hands of a government 
agency. * * * I say this despite my conviction that the officials 
who administer local, state and federal programs would stand 
toward the top in competence and dedication to duty. But no one 
would deny that administrative agencies can and do make mistakes; 
as with any group, no official is infallible, and some are more 
fallible than others. And not infrequently a lawyer can bring out 
facts or considerations that the administrator with the best will 
in the world would otherwise overlook. 

Counsel Willcox' s comments focused on the help that lawyers can and 
do give their clients. Today there is serious debate in many quarters over 
the question of whether lawyers are the only professionals who can provide 
assistance or representation in administrative proceedings. ° There is also 



° Lay advocates who counsel and assist citizens with their 
administrative problems have been used with considerable success in other 
countries. A notable example are the 750 Citizen Advice Bureaus widely used 
in Great Britain. These neighborhood offices handle each year some three 
million requests for information and advice and are providing an increasing 
amount of nonlawyer representation in administrative appeal proceedings. 
See Sloviter, Let's Look at Citizens Advice Bureaux , 65 American Bar 
Association Journal 567 (1979); Zucker, Citizen's Advice Bureaus , paper 
presented at the Conference on the Extension of Legal Services to the Poor, 
Department of Health, Education and Welfare, Washington, D.C. November 12, 
196A. A few comparable examples can be found scattered throughout this 
country. For example, the Women's Legal Defense Fund in Washington, D.C. 
employs nonlawyers to provide assistance and representation before 
administrative, prosecutorial and judicial branches of the D.C. government 
in cases involving battered women. Annual Report of the Women's Legal 
Defense Fund (198A) on file with the District of Columbia Bar Foundation. 
Many commentators have urged an increased use of nonlawyer professionals to 
provide assistance to citizens who have a wide range of administrative 
agency problems and also to those who have non-administrative agency 
disputes such as those ending up in small claims courts. See , e.g. , Sparer, 
Thorkelson & Weiss, The Lay Advocate , A3 U.Det.L.J. A93 (1966); Zander, 
Legal Services for the Community (1978); Bellow, "Legal Services to the 
Poor: An American Report," chapter in Access to Justice and the Welfare 



NONLAWYER ASSISTANCE 57 

continuing debate over the question of whether the traditional adversarial 
methods employed by lawyers are the only methods for resolving disputes 
(either in administrative or judicial settings.) 

It is not necessary to discuss here the pros and cons of these 
relatively global topics. It is sufficient to focus in this paper on the 
fact that lawyers, even if they are to be preferred in administrative agency 
proceedings, are not available in adequate numbers to meet all the needs for 
assistance in mass justice agencies. As we shall see, there are large gaps 
in representation even at the hearing and adversarial stages of mass justice 
agency review, and there was uniform agreement among agency participants 
interviewed that the gaps are even larger at the more informal application 
and consultation stages. This does not reflect an inadequate supply of 
lawyers in the country but, rather, reflects an inadequate supply of lawyers 
under our current legal service delivery systems, to provide the assistance 
that poor and moderate income persons can afford for their everyday, not 
very remunerative (for lawyers), mass justice agency claims and 
applications . ^^ 



State , 49 (Capeletti ed. 1980); Statsky, Paralegal Advocacy Before 
Administrative Agencies; A Training Format , 4 Toledo L.Rev. 439 (1973). 

^ The need to explore differing methods of resolving legal disputes as 
an alternative to traditional adversarial methods has been a matter of well 
publicized discussion in recent years. See generally Goldberg, Green and 
Sander, Dispute Resolution (Little, Brown and Co. 1985). The American Bar 
Association and several courts systems, including that of the District of 
Columbia, are currently fostering experiments with mediation, voluntary and 
mandatory arbitration, and other nonadversarial programs, some of them as 
part of an ABA funded pilot "multidoor courthouse" program. See Edelman, 
Institutionalizing Dispute Resolution Alternatives , 9 Just.Sys.J. 134 
(1984). The Administrative Conference of the United States adopted a 
recommendation in 1982 urging federal agencies to undertake experiments with 
mediation techniques in rulemaking procedures. As a result, several federal 
agencies, including the Environmental Protection Agency and the Federal 
Trade Commission, have done so. See ACUS Recommendation 82-4; Harter, 
Negotiating Regulations; A Cure For Malaise , 71 Georgetown L.J. 1 (1982). 

According. to experts in the field of alternative disputes, trained 
nonlawyer professionals are an integral part of the current development of 
nonadversarial alternatives. Interviews with Michael Lewis, Deputy 
Director, National Institute for Dispute Resolution; Linda Singer, Executive 
Director of the District of Columbia Center for Community Justice. 

■'■^ Former president Carter characterized the distribution of legal 
services in the nation with the much publicized statement that "We are 
overlawyered but underrepresented." Speech to the Los Angeles County Bar 
Association on the occasion of its centennial celebration, 1978. 



58 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

Legal services in the administrative agency field have historically 
been available to those who could afford to pay for them. (Those seeking a 
television license or an airline route, for example, have been heavy users 
of available legal resources.) For many years, little attention was paid to 
the fact that low and moderate income persons were developing increased 
contacts with federal and state administrative agencies and needed 
assistance. In the mid-1960s, attention was focused on this phenomenon and 
particularly on the impact of administrative decisions on the poor. 
Professor Edward Sparer, the director of a legal services program and a 
leader in the movement to provide free legal aid to the poor, wrote in 196A 
that : 

No longer is the primary contact of the poor man with the law 
in the ordinary courtroom (criminal or otherwise) but in the 
anteroom of a city, state or federal agency as he awaits a 
determination of vital significance to him and his family. ^^ 

With increased national attention on the needs of the poor in the 
mid-1960s, new efforts were made both by government and by private social 
welfare agencies to provide legal aid and paralegal assistance to those who 
were at the bottom of the economic scale. Neighborhood legal aid programs, 
with monies provided by the federal Legal Services Corporation, were 
established in every state. However, as Derek Bok, President of Harvard 
University, has pointed out: "Even in its palmiest days, the Corporation 
was only empowered to help the poor and had money enough to address but a 
small fraction of the claims of even this limited constituency."^^ (Other 
studies, and this author's interviews with legal aid groups, confirm that 
legal assistance organizations serving the very poorest cannot meet all the 



^^ Sparer, The New Public Law; The Relation of State Administration 
to the Legal Problems of the Poor , paper presented at the Conference on the 
Extension of Legal Services to the poor sponsored by the Department of 
Health, Education and Welfare, Washington, D.C., Nov. 12, 196A. See also 
Reich, The New Property , 73 Yale L.J. 731 (1964); Hostetler, "Poverty and 
the Law," chapter in Poverty As A Public Issue (ed. Seligman), p. 177 (Free 
Press-MacMillan) 1965. 

^^ Bok, Law and Its Discontents; A Critical Look at Our Legal System , 
37th Annual Cardozo Lecture, 38 Record of the Association of the Bar of the 
City of New York (No. 1) 12, 18 (1983). The Legal Services Corporation had 
estimated in 1978 that, nationally, no more than one out of seven persons 
qualifying under the Corporation's income standard for free legal assistance 
was assisted by federally funded legal service programs. The Legal Services 
Corporation and the Activities of its Grantees; A Fact Book (Legal Services 
Corporation; Spring 1979). The cuts in federal funding for the Corporation 
since 1978 have reduced legal aid office budgets by 25% and thus exacerbated 
the problem of inadequate resources for indigents. 



NONLAWYER ASSISTANCE 59 

requests for help and must frequently close their doors for intake of new 
cases - sometimes for months at a time.) 

At the same time, the legal needs of the working poor and moderate 
income groups have never been met by federally funded legal aid programs, 
and they continue to be largely ignored by federal and state policymakers 
(although there are some evolving experiments in the private sector with 
prepaid legal services and high volume clinics). As Harvard President Bok 
observed generally with regard to the millions of people with modest 
incomes, "the cost of legal services grows much faster than the cost of 
living * * * [and] [i]n practice most people find their legal rights 
severely compromised by the cost of legal services. .. ."■'■^ The president of 
the American Bar Association recently wrote that "Many middle- income 
Americans . . . find themselves unable to assert their legal rights because 
they cannot afford to do so. According to some estimates, as many as 100 
million Americans find themselves in this position". ■'•^ The high cost of 
lawyers is a factor frequently cited in public opinion polls as to why 
citizens do not make greater use of lawyers, and complaints about excessive 
fees comprise the largest single category of client complaints against 
lawyers lodged with bar disciplinary entities. ■'•° 

As a result of the high cost of legal assistance, many of those who 
are neither very poor (and thus eligible for federally subsidized legal aid) 
nor very affluent (and thus in a financial position to purchase lawyers' 
services at prevailing market rates) do without legal assistance for many 
kinds of legal problems, including problems with administrative agencies. 
The American Bar Foundation conducted a survey of over 2,000 families in the 
mid-1970s to assess the personal, nonbusiness problems encountered by the 
public and their use of lawyers' services to aadress these problems. The 
survey revealed that overall less than one out of two persons who reported 
having had a "serious personal (nonbusiness) difficulty with a government 
agency" had consulted a lawyer. The survey revealed that lower- income 
persons were even less likely to consult a lawyer; and that over 50% of all 



^-^ Report of the Committee on Civil Legal Services of the Judicial 
Conference of the District of Columbia (1980) p. 13; interview with Ann 
Barker, Director of Public Service Activities, District of Columbia Bar. 

1^ Bok, Note 12 supra , at 13. 

^5 Falsgraf, "Access to Justice in 1986", ABA Journal, Feb. 1, 1986. 

^° Interview with Thomas H. Henderson, Jr., Deputy Bar Counsel, Board 
on Professional Responsibility, District of Coltombia Bar. 



60 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

income groups thought that lawyers charged more for their services than they 



were worth 



17 



While the extent of national unmet needs for assistance with legal 
problems generally, or with administrative problems specifically, cannot be 
calculated with mathematical precision, there was widespread agreement among 
persons interviewed for this report that the studies and estimates of need 
discussed above are generally accurate and that at least a substantial 
number of individuals who are involved in mass justice agency proceedings 
have unmet needs for assistance, particularly at the very early stages where 
forms need to be filled out and rules explained. ° In the immigration area, 
estimates of need ranged between 50% and 80%. (An example of this is 
illustrated by a visit in connection with this report to a local office of 
the Immigration and Naturalization Service. Over one hundred persons, most 
of whom were non-english speaking, were milling around and trying to find 
out which of two lines to stand in to obtain or process various INS forms. 
It took approximately two hours or more to reach the head of the line, at 
which time one could finally ask whether one was in the correct line. If 
the individuals mistakenly stood in the wrong line (which was a common 
happenstance) they would then have to start all over again at the end of the 
other line. Several families and their children were observed to have been 
there nearly all day. Only one person in the room appeared to have the 
assistance of an English speaking advocate. There was no information or 
assistance desk provided either by INS or by a nonprofit agency.^' 

Similarly, it is not known how many individual applicants for social 
security insurance or social security disability benefits need, but do not 
receive, assistance at the early stages of filling out forms and amassing 
relevant employment, medical, and other documentary evidence. It is known 
that at the hearing stage, 38% of Social Security claimants were 
unrepresented in 1983, and that agency statistics indicate that 



^ ' The Legal Needs of the Public; Final Report of a National Survey 
(ed. Curran), American Bar Foundation (1977) at pp. 115-lAO; 2A0-249. 
Interestingly, over 75% of all income groups thought that many things 
lawyers handle could be done as well and less expensively by nonlawyers. 

^° A 1980 study of the District of Columbia Court system disclosed an 
exceptionally high number of unrepresented persons in "mass justice" court 
proceedings. For example, the study disclosed that 98% of tenants in 
landlord- tenant court were unrepresented and that in divorce, support and 
custody cases, at least one party was unrepresented in 85% of the cases. 
Report of the Committee on Civil Legal Services of the D.C. Judicial 
Conference, Note 13, supra. 

. At one time, an information and assistance desk was staffed by 
local nonprofit agencies, but the INS required it to be moved some months 
ago because of a lack of space in the room. Interviews with staff of AYUDA, 
note 2 supra . 



NONLAWYER ASSISTANCE 61 

unrepresented claimants are less likely to prevail at that stage than those 
who are represented. ^ 

By way of contrast, in the Internal Revenue Service (where federal 
policy has long encouraged free choice of representative, including 
nonlawyers) there is a whole continuum of help available to the public 
ranging from free assistance to all taxpayers from the IRS itself or to 
indigents from legal aid agencies - to tax preparation services for the 
middle income groups at modest fees, such as those operated by H. Se R. Block 
and Sears Roebuck - to the more sophisticated and relatively costly help of 
enrolled agents, certified public accountants and lawyers - to the most 
rarified (and usually expensive) specialty tax law firms. 

Because of what appears to be a significant volume of unmet needs for 
assistance in mass justice agencies, and because the Internal Revenue 
Service model has proven to be a highly successful method for delivering 
administrative agency assistance across a broad economic spectrum, 
increasing numbers of administrative agency officials and practitioners have 
suggested that the potential for increased nonlawyer assistance in mass 
justice agencies should be explored. Some of the suggestions have given 
rise to this study. ■^^ 



^^ See note 3, supra . Some unrepresented claimants, of course, are 
capable of representing themselves at hearings (and at earlier stages) and 
certainly all persons are entitled to do so if they so choose. In addition, 
some unrepresented claimants may have such frivolous appeals that no 
professional would be willing to provide assistance. Notwithstanding these 
factors, it is likely that a significant portion of those unrepresented in 
agency hearings would welcome assistance but are unable to obtain it at an 
affordable price. 

Conversely, in the area of Veterans benefits, there is a long tradition 
of free service to veterans provided by service organizations such as the 
American Legion, the Disabled American Veterens and the American Red Cross. 
(The Veterans Administration provides free office space to those 
organizations.) Only 12% of claimants in V.A. hearings proceed pro se and 
it is generally assumed that a large portion, if not all of them, prefer to 
represent themselves. See Popkin, note 3, supra , and Walters v. National 
Ass'n of Radiation Survivors , note 4, supra , at 318A, and discussed further 
at note 5A of- this report. 

See, for example, comments by several speakers at the 29th Plenary 
Session of the Administrative Conference of the United States held on 
December 6 and 7, 1984, urging the Conference to study the issue of 
nonlawyef representation in administrative procedure generally and in the 
area of mass justice particularly. 1984 Report of the Administrative 
Conference of the United States , at 36 (May 1984). 

Another possible alternative for providing increased assistance to 



62 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

It has also been suggested that an increased supply of nonlawyer 
professional assistants will bring down the cost of lawyers' fees.'^^ This 
proposition is open to question - it is not apparent that "uptown" corporate 
law firms specializing in tax matters have reduced their hourly rates in 
recent years as a result of competition from H. & R. Block and Sears 
Roebuck. Whether or not this prognosis would prove to be true, however, it 
does seem likely that alternative sources of lower cost assistance will be 
utilized by low and moderate income persons who do not currently employ 
lawyers. A similar result appears to have occurred in legal areas such as 
divorce cases and will preparation in the aftermath of Supreme Court 
decisions allowing lawyer advertising.^-^ 



those who are currently unrepresented is for the federal government to 
encourage an expanded use of lawyers. One way to accomplish this would be 
for the federal government to increase the budget of the Legal Services 
Corporation and, in addition, make moderate income persons eligible for its 
funded services. Another way would be for the federal government to provide 
additional attorney fee awards in mass justice proceedings in the 
expectation that this would draw increased numbers of private attorneys. 
However, neither of these approaches, even if they are desirable, is 
economically or politically viable at this time in light of the current 
national efforts to reduce federal budget expenditures. 

Even though some attorney fee awards - those in social security 
disability cases, for example - can be paid out of amounts due claimants, 
rather than out of the public purse (except when attorney fee awards are 
made under the Equal Access to Justice Act), there is no pool of claimant 
money when the claimant is unsuccessful, when the government is seeking to 
recover funds from the client (as in a social security overpayment case for 
example) or in proceedings not involving money claims such as those in the 
immigration field. 

^^ See, for example, Morgan, The Evolving Concept of Professional 
Responsibility , 90 Harv. L.Rev. 702 (1977). 

^■^ Although a Federal Trade Commission study in 1984 attempted to show 
that lawyers' fees came down following Bates v. Arizona State Bar , A33 U.S. 
350 (1977) and progeny, the study in fact demonstrated only that lower 
priced services were available in the communities studied and not that 
particular lawyers had lowered their fees for their existing services, or 
that services requiring equivalent expertise and time were being offered for 
less. The real benefits that appear to have resulted from the Supreme 
Court's lawyer advertising decisions are (1) they allowed those lawyers 
already offering reduced fees (often newly minted law school graduates) to 
advertise that fact; and (2) they encouraged the development of new legal 
service delivery systems - that is, high volume, low-cost clinics - to serve 
low and moderate income persons who before then usually had to choose 
between high-cost lawyer services and doing without legal assistance. 



NONLAWYER ASSISTANCE 63 

In any event, a broadened range of assistance for individuals 
involved in mass justice agency proceedings - and the right to free choice 
of assistance at an affordable price - are likely to foster improved 
perceptions of fair procedure on the part of the citizenry. This is 
particularly true when those who are represented are more likely to prevail 
in agency proceedings than those who are unrepresented."^^ 



I 



I 



^^ See note 3, supra . 



64 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

III. Nonlawyer Professionals Currently Meet Many of the Needs for 
Assistance of Individuals Involved in Mass Justice Agency 
Proceedings and As a Class Are Competent to Do So 

Results of this investigation reveal that not all proceedings in mass 
justice agencies are so difficult or specialized that they require the 
specially trained skills of a lawyer. To the contrary, they reveal that 
many early stage proceedings are sufficiently non-complex and informal that 
in order to provide competent assistance, one need only be intelligent, 
well-versed in the subject matter and procedures of the agency in question, 
and experienced in providing assistance to the agency's constituency. This 
investigation further revealed that even in many of the later stages of 
agency proceedings, including adversarial proceedings, experienced 
nonlawyers can and do perform competently. 

To begin with, investigation disclosed that nonlawyers already 
practice to a modest extent in almost all federal administrative agencies 
and do so to an even greater extent in all four of the mass justice agencies 
excimined.^^ For example, while the Social Security Administration does not 
maintain statistics on nonlawyer assistance at all levels o^ agency process, 
its Office of Hearing Appeals has published data showing that in 1983 
nonlawyers entered appearances as sole representatives for social security 
claimants in 11.2% of all request for hearing matters. (In another l.A% of 
the matters, nonlawyers appeared jointly with lawyers. )'^° 

The Immigration and Naturalization Service does not maintain 
statistics on categories of representatives, but agency officials reported 
that nonlawyers regularly practice in the agency at all stages, including 
hearings, and that applicants for adjustment of status are regularly 
referred by INS to social service agencies which are staffed primarily by 
nonlawyers."^' The Veterans Administration statistical data shows that 



25 See survey conducted by the American Bar Association Standing Committee 
on Lawyers' Responsibility for Client Protection and the American Bar 
Association Center for Professional Responsibility, attached to this paper 
as Appendix A. Similar findings are set forth in Professor Rose's study for 
the Administrative Conference, Note 1, supra . 

■^" Office of Hearing Appeals, Social Security Administration, 
Participant Involvement in Request for Hearing Cases for Fiscal Year 1983 , 
May 198A. A copy of this statistical report is attached to this paper as 
Appendix B. 

^' Interviews with Yolanda Sanchez, Acting Director, Outreach Program, 
and J. Hurwitz, Board of Immigration Appeals for the Immigration and 
Naturalization Service; also see American Bar Association Committee Report, 
note 22, supra , set forth in Appendix A. 



NONLAWYER ASSISTANCE 65 

nonlawyers appear in representative capacities in 86% of all cases involving 
claims for disability benefits and appear at all stages of agency review. ^° 
(There is no judicial review of agency decisions.) While the Internal 
Revenue Service does not maintain statistical data on the category of 
representatives in its proceedings, it reports that several hundred thousand 
nonlawyers are entitled to appear before the Service, and that in fact a 
very large number of nonlawyers (ranging from H.R. Block tax preparers to 
certified public accountants) regularly appear every year. (Nonlawyers who 
pass an examination may also represent taxpayers in the Tax Court. )^^ 

Investigation also revealed that nonlawyers in the four agencies 
examined appear at all levels of agency proceedings, both adversarial and 
nonadversarial, and were reported to perform at each of these levels the 
identical functions that lawyers perform. -^^ (Although there was no 
statistical data available, it was reported that nonlawyers sometimes, but 
not always, withdraw in favor of lawyers in some representational 
proceedings, such as deportation cases and tax cases involving charges of 
criminal fraud, even though agency rules do not require withdrawal. )-^^ 
Although the mass justice agencies examined do not maintain statistical data 
on categories of representatives at all levels of agency process, there was 
uniform agreement by government officials interviewed that by far the 
greatest volume of nonlawyer assistance takes place at the very early 
stages. Much of this assistance takes place before a claim or application 
is filed with an agency. 



Statistical data on representation in the Veterans Administration 
was part of the record and cited in the Supreme Court's opinion in Walters 
V. National Association of Radiation Survivors . 105 S.Ct. 3180, 318A (1985). 

2^ As of January 31, 1983, there were 28,077 enrolled agents on the 
roster of the Internal Revenue Service. In addition, certified public 
accountants (of whom there are some 200,000 belonging to the American 
Institute of Certified Public Accountants) are entitled to appear before the 
IRS. Also an unknown number of persons working for tax preparation services 
such as H.R. Block and Sears Roebuck regularly appear before the Service in 
connection with returns they have prepared. (H.R. Block maintains 7,672 
offices in nearly every town and city in the country, according to a 
Business Week report dated June 17, 1985, (p. 89).) The IRS data is largely 
obtained from -Professor Rose's study, note 1, supra at 51-54. It was 
confirmed by interviews with the Internal Revenue Service and by results of 
the survey conducted by the American Bar Association, note 25, supra (and 
set forth in Appendix A). 

Similar findings of performance of identical functions in non-mass 
justice agency proceedings such as those performed in the patent office were 
made in the Rose study, note 1, supra , at 51. 

3 1 

Rose, id. at 53; INS interview with Sanchez, note 27, supra . 



66 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

Nonprofit agencies specializing in assisting low-income persons with 
social security claims or immigration problems also stated in interviews 
that the great majority of their work involved the early non-adjudicative 
stages of agency practice - that is, assisting persons with preparation of 
applications and other forms, gathering of supporting materials, explaining 
to them agency rules and procedures, and sometimes accompanying them to 
initial interviews and conferences. ^ For example, AYUDA, a legal aid 
organization in the District of Columbia serving a largely Hispanic 
population, estimated that 80% of the agency's immigration caseload of some 
2,000 cases involved providing assistance with routine applications for 
adjustment of status (primarily because of a relationship to a U.S. citizen) 
and other relatively non-complex matters such as applications for 
citizenship or extensions of stay. The agency reported further that this 
work was currently performed primarily by the agency's nonlawyer staff. -^-^ 

Similarly, the Legal Counsel for the Elderly Program, a federally 
funded legal assistance progrcim specializing in social security and other 
matters affecting elderly persons, reported that it relies primarily on 
nonlawyers to visit nursing homes and hospitals, and to assist elderly and 
disabled clients in filling out application forms for social security and 
other welfare benefits. The lawyer director of the program stated that it 
was his experience that the agency's nonlawyers did a better job than law 
students (whose work he sometimes reviewed) because the law students were 
either less well-trained or less inclined to spend long hours going over 
medical records, interviewing doctors, co-workers and employers to establish 
medical disability, and pulling together other essential facts needed to 
fill out forms properly. He also noted that nonlawyers are generally better 
trained, more skillful, and more patient than lawyers, in interviewing those 
clients who are ill, confused, illiterate or handicapped.-^^ 

That there are literally hundreds of thousands of low- level tasks of 
a non-adjudicative nature in administrative practice is, of course, well- 
known. In 1969 Justice Douglas stated the rationale for permitting 
nonlawyer assistance at these levels: 



32 



See note 2, supra , for a list of non-profit agencies interviewed. 



^^ Interview with Yvonne Vega, Executive Director of AYITDA, in 
Washington, D.C. AYUDA has "recognized" status under INS regulations, and 
the Outreach Program of INS has described AYUDA as having "a highly 
qualified staff" which "has an outstanding reputation for relying on the law 
to assist clients." Letter dated March 29, 1985 from the acting director of 
the Outreach Program of INS, Yolanda Sanchez, on file with the District of 
Columbia Bar Foundation. 

^^ Interview with Michael Schuster, Legal Counsel for the Elderly, in 
Washington, D.C. 



NONLAWYER ASSISTANCE 67 

[I]t is becoming abundantly clear that more and more 
of the effort in ferreting out the basis of claims and the 
agencies responsible for them and in preparing the almost 
endless paperwork for their prosecution is work for laymen. 
There are not enough lawyers to manage or supervise all of 
these affairs; and much of the basic work done requires no 

-J c 

special legal talent. -* 

More recently. Justice Rehnquist expressed similar views in the Court's 
plurality opinion upholding nonlawyer assistance to veterans in disability 
benefit proceedings under a statutory fee limitation of $10 that had the 
practical effect of discouraging legal counsel for fees. Walters v. 
National Ass'n of Radiation Survivors . 105 S. Ct. 3180, 319A (1985).^^ 
Justice Rehnquist added with regard to the issue of innate skills of lawyers 
and nonlawyers that it was "less than crystal clear why lawyers must be 
available to identify errors in medical judgement." ( Id. , emphasis by the 
Court . ) 

Some of the early stages of administrative proceeding involve 
informal conferences or interviews, at which time many claims and disputes 
are resolved. These proceedings were deliberately designed to be informal 
in order to facilitate easy access to the agency by nonlawyers. Even in 
adjudications, formal rules of evidence and procedure are largely 
inapplicable.-^' In addition, many of the issues resolved by mass justice 
agencies are commonly thought of either as "non-complex" or "largely 
factual" and, therefore, matters that neither require lawyers to present 
them nor lawyers to adjudicate them. (Internal Revenue Service and Veterans 
Administration appeals are sometimes said to be in this category. )-^° 

Of course, the questions of what is a "complex" matter or a matter 
"fraught with legal ramifications" are not easily answered, and they have 
been a matter of ongoing debate between lawyers and nonlawyers for many 



^5 Johnson v. Avery , 393 U.S. A87, 151 (1969) (concurring op.)(The 
Court held that in the absence of lawyers, the state could not validly bar 
nonlawyers -in this instance, prison inmates - from furnishing legal 
assistance. ) 



36 



See note 5A for a discussion of Walters. 



^' Gellhorn, Qualifications for Practice Before Boards and 
Commissions , 15 U.Cin.L.Rev. 196, 200-202 (19A1). 

^° Walters v. National Association of Radiation Survivors , supra 
(plurality of opinion of Justice Rehnquist at 319A with respect to veterans 
appeals); Rose, note 1 supra , at 27 et. seq.; Morgan, The Evolving Concept 
of Professional Responsibility , 90 Harv.L.Rev. 702 (1977); Comment, 
Representation of Clients Before Administrative Agencies; Authorized or 
Unauthorized Practice of Law? , 15 Valparaiso L.Rev. 567 (1981). 



68 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

decades. It is not the purpose of this paper to resolve this sometimes 
metaphysical debate. It will suffice to observe what is apparent: that 
there are many non-trial type functions in non-courtroom settings which 
today can be, and are, performed competently by lawyers and nonlawyers 
alike, and this is so notwithstanding the fact that legal consequences 
affecting rights and obligations of parties may flow from the performance of 
any one of them. Indeed, casebooks are replete with judicial decisions 
allowing nonlawyers to undertake a variety of activities (such as real 
estate settlements, creation of trusts, and tax return preparation) even 
though these same activities are also performed by lawyers - even 
specialized in by some lawyers - and have legal consequences.-^' 

Interviews with mass justice agency personnel revealed a high level 
of satisfaction with nonlawyer representatives, not only at the early stages 
of assisting with forms and informal conferences, but also at later stages 
of agency proceedings. Similar findings of agency satisfaction with 
nonlawyer performance in administrative proceedings generally were made in 
the American Bar Association Committee survey set forth in Appendix A to 
this paper, and by Professor Rose in his study for the Administrative 
Conference. ^^ The overwhelming majority opinion is that there is little 
perceived difference in the quality of help between lawyers as a class and 
nonlawyers as a class. ^^ Viewpoints on competence and quality of work are, 
of course, necessarily subjective. However, investigation reveals that 
agency staff perceptions (that nonlawyers as a class perform as competently 
as lawyers as a class at virtually all stages of administrative agency 
proceeding) are supported by the agencies' statistical data. 



^^ Conversely, courts have also found at various times that the 
identical activities constitute the practice of law and can be performed 
only by lawyers. See discussion in the text at notes 81-8A. In barring 
nonlawyers from practice before state administrative agencies, state courts 
have tended to over-emphasize the extent of the legal skills and training 
required without considering the objectives of the administrative agency and 
the informal nature of its proceedings. This thesis emerges from a study of 
state unauthorized practice decisions concerning practice before state 
administrative agencies. See Comment, Valparaiso L.Rev. , supra , note 38, at 
590. 

^^ Rose, note 1, supra , at 54, 92. 

^^ The ABA survey, note 25, supra , discloses that most agencies 
reported that nonlawyers did not pose any special practice problems, and 
that of those voicing complaints, nearly all said that the problem 
encountered most frequently was nonlawyer unfamiliarity with procedural 
rules and tactics. (It appears that responses to the ABA survey may not 
have been limited to nonlawyer representatives but may also have included 
complaints about nonlawyer claimants appearing pro se. ) 



NONLAWYER ASSISTANCE 69 

For example. Social Security Administration data for 1983 shows that 
nonlawyers made a significant difference when they represented claimants in 
hearings. Claimants represented by nonlawyers were appreciably more likely 
to win their cases than they were if unrepresented. Moreover, 
representation by nonlawyers resulted in reversal rates after hearings that 
were almost as high as those achieved by lawyers. The 1983 data reveals 
that those who were unrepresented obtained reversals in only 43.7% of their 
cases. Representation by a nonlawyer increased the reversal rate to 54.5% 
as compared to a reversal rate in lawyer represented cases of 59%.'^^ Thus, 
nonlawyers increased their clients' chances of reversal by 10.8% over those 
who were unrepresented, but persons represented by a lawyer were successful 
in only 4.5% more cases than persons represented by nonlawyers. 

Similarly, the record in Walters v. National Association of Radiation 
Survivors , supra , at 3193, established that in disability review proceedings 
of the Veterans Administration, persons represented by nonlawyers were 
nearly as likely to prevail on appeal to the agency's Board of Veterans 
Appeals as those represented by lawyers. (The agency's statistics 
demonstrated that veterans represented by laypersons employed by non-profit 
service organizations such as the American Legion prevailed in approximately 
16% of the appeals, and that veterans represented by privately retained 
lawyers and nonlawyer agents prevailed in 18% of the appeals.)^-' 

Even in agencies where the subject matter can be technical or 
complex, there is empirical evidence to demonstrate that nonlawyers can 
provide effective assistance. The processing of patent claims before the 



^^ Participant Involvement in Request for Hearing Cases for Fiscal 
Year 1983 , supra , note 3. See also Popkin, The Effect of Representation in 
Nonadversary Proceedings -- A Study of Three Disability Programs , 62 Cornell 
L.Rev. 989 (Aug. 1977). This in-depth study of three federal agency 
disability programs found that representation significantly increased 
chances of reversal of initial adverse agency rulings. The study did not 
focus its attention on the differences between attorney and nonattorney 
representation or the ensuing results. It did incidentally disclose, 
however, that in social security disability hearings, attorneys were no more 
likely than nonlawyers to request new hearings (although the author's 
sampling suggested that they were more likely to present new evidence). 

^^ Several non-profit agencies and the District of Columbia Bar 
provide intensive training courses and materials for nonlawyers in 
disability benefits law and in immigration matters. Interviews with the 
training directors for those programs elicited the universal estimate that 
the success rates of their intensively trained nonlawyers were very high. 
Interviews with Schuster, note 32, supra . Vega, note 31, supra , and Leslie 
Long O'Leary of the District of Columbia Bar. It should be noted that the 
success rates of nonlawyer employees of nonprofit organizations are no doubt 
enhanced by training programs and also (when it is provided) by supervision 
and assistance by staff lawyers. 



70 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

Patent Office, for example, is not within the technical expertise of most 
persons - lawyers or nonlawyers. As the Supreme Court observed in Sperry v. 
Florida ex rel Florida Bar , 373 U.S. 379 (1962) "(d)rafting of the 
specifications and claims of the patent application. . .this Court long ago 
noted ' const itute[s] one of the most difficult legal instruments to draw 
with accuracy,' Topliff v. Topliff , 1A5 U.S. 157, 171." The Sperry Court 
went on to note: 

And upon rejection of the application, the 
practitioner may also assist in the preparation of 
amendments. . .which frequently requires written argument to 
establish the patentability of the claimed invention under 
the applicable rules of law and in light of the prior art. 

Notwithstanding the legal difficulties alluded to by the Court, the Court 
unanimously concluded that the activities involved in patent law practice 
could be performed by nonlawyers as well as lawyers. Moreover, the Patent 
Office has consistently reported a high degree of satisfaction with the 
quality of representation provided by nonlawyer patent agents. '^^ Other 
federal agencies also allow nonlawyer representation, notwithstanding the 
fact that the subject matter of the representation requires considerable 
technical legal expertise. (Examples include the Internal Revenue Service 
and the Interstate Commerce Commission.)^-* 

A number of the non-profit agencies interviewed for this report 
stressed that their nonlawyer employees and volunteers were specially and 
intensively trained to fill out administrative agency forms and to answer 
questions concerning agency rules and procedure.^" They opined that it was 
their experience that lawyers had rarely, if ever, received any training in 
these functions as part of their law school curricula. Others noted that it 
was their experience that nonlawyers could be trained to perform well 
virtually all functions in administrative agency proceedings, including 
representation in adversarial hearings, and that a part of this training 
stresses the need to compile an adequate record for any eventual judicial 
review.^' 

Commentators have undertaken to analyze the various skills commonly 
thought of as "lawyers' skills" (including skills such as negotiating 
techniques, analytic abilities, powers of written and oral communication, 
reasoning, and judgment) and concluded that some or all of these skills are 



^^ Sperry v. Florida ex rel Florida Bar , supra , at 402. 

^5 See 31 CFR 10. 3-. 8 (IRS) and A9 CFR 1100.9 (ICC). 

^° See note 43 supra . 

^' See Statsy, Paralegal Advocacy Before Administrative Agencies; A 
Training Format , 4 Toledo L.Rev. 439 (1973). But see note ... supra . 



NONLAWYER ASSISTANCE 71 

also possessed by many nonlawyer professionals. ° This study has not 
attempted to parse finely here the particular skills involved in each stage 
of each mass justice agency proceeding. However, one common theme that was 
recurrently heard in interviews and confirmed by observations of mass 
justice agency proceedings was that those professionals (lawyers and 
nonlawyers) who are trained and experienced in particular functions do them 
relatively well and vice-versa. Conversely, having a law degree (or other 
degree) was no guarantee of proficiency in all administrative agency 
functions. This appears to be as true at the most advanced representational 
functions in agency proceedings as it is often recognized is true in 
courtroom proceedings.^^ 

In preparing this report, it was useful to examine for comparison 
purposes the proceedings of the Internal Revenue Service. It was found that 
nonlawyers regularly assist taxpayers at the earliest stages of simple tax 
return preparation all the way through the various levels of the Service, 
including audits and appeals. In addition, a nonlawyer may, by an 
examination procedure, become qualified to practice even before the U.S. Tax 
Court. ^^ While only lawyers, certified public accountants,* and those who 
pass examinations ordinarily provide representation at the highest levels of 
agency proceedings, nonlawyers who are not in any of these categories are 
also entitled to appear and assist taxpayers in connection with tax returns 
that they prepare. ^^ 

While some of the nonlawyers providing assistance are highly skilled 
and trained in tax law, including certified public accountants, others - for 



^° See Morgan, note 22 supra ; Rhode, note 81 infra. 

^^ Chief Justice Burger, in a famous Fordham University speech, stated 
his opinion that one third to one half of the lawyers who appear in serious 
cases before the courts are not really qualified to render fully adequate 
representation. Burger, The Special Skills of Advocacy , A2 Fordham L.Rev. 
227, 234 (1973). Also see Bazelon, The Defective Assistance of Counsel , A2 
U.Cin. L.Rev. 1 (1973). Criticism of deficiencies in trial representation 
led to the appointment of a Committee to Consider Standards to Practice in 
the Federal Courts (chaired by Chief Judge Devitt of Minnesota) and fourteen 
federal courts engaged in a resulting pilot proposal requiring examination, 
minimum trial experience, and peer review. See Winter, Federal Courts 
Implement Devitt Proposals , 67 ABA J. 550 (1981). 



50 



See note 27, supra ; 31 CFR 10. 3-. 8, 



^^ One may become an enrolled agent by passing a rigorous examination, 
This enables the person enrolled to advertise to the public that he or she 
is an enrolled agent and to provide representation in any matters. This 
procedure, however, does not preclude others who are not lawyers, CPAs, or 
enrolled agents from providing the same services in connection with their 
own clients whose tax returns they have prepared. 



72 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

example, those persons who receive minimal training and work for high volume 
clinics such as those operated by H.R. Block, or who conduct their own 
individual tax services - may be distinctly less so and frequently do not 
have bookkeeping, accounting or legal experience. Internal Revenue Service 
officials who were interviewed reported that the Service does not maintain 
statistical data on comparative success rates by lawyers and 
nonlawyers but they expressed views similar to those interviewed at the 
Social Security Administration and INS: that there is little discernible 
difference in effectiveness between lawyers and nonlawyers as groups. 
Rather, the differences lie in the relative intelligence and skills of the 
particular individual. 

It is important to note that agency officials interviewed for this 
study did not suggest that a lawyer might never be able to perform any 
representational functions "better" than a nonlawyer. It was further 
recognized that even the preparation of a simple tax return, an application 
for disability benefits or a petition for adjustment of non-resident status 
can be fraught with peril for the client if poorly done and not corrected. 
The importance in many proceedings of establishing a record for possible 
future judicial leview was also acknowledged. Nonetheless, agency personnel 
stressed that in their experience there was no guarantee that any given 
lawyer would necessarily provide better representation than any given 
nonlawyer. 

Thus, it would appear that the relevant inquiry is not whether a 
particular lawyer can provide better representation in a given matter than a 
nonlawyer, or might have a slightly higher statistical chance of obtaining 
reversal or administrative review, but whether all lawyers as a class 
perform better than the class of nonlawyers. The statistical data 
concerning success rates in mass justice agencies and the subjective data 
elicited in interviews suggest that the answer to the latter question is 
negative. 

Moreover, this author suggests that the most important question in 
mass justice agencies is not whether a given lawyer will or will not do a 
better job of representation at every stage of the proceeding than a 
nonlawyer, or will build a better record for judicial review, but whether 
sufficient numbers of proficient lawyers are able and willing to provide the 
assistance that is needed and desired by large numbers of ordinary citizens 
with their everyday, not very remunerative, claims and disputes before the 
agencies, and to provide that assistance for fees that the individuals can 
afford. The evidence discussed in Part II above compels the conclusion that 
they are not available to meet the needs. 

As we shall see in the succeeding sections of this report, the 
Administrative Procedure Act (as well as several statutes governing specific 
agencies) empower federal administrative agencies to authorize lay 
representation in proceedings before them. However, mass justice agencies 
fail to do as much as they might under these statutes to encourage that 
representation. In addition, although federal statutes (and some agency 



NONLAWYER ASSISTANCE 73 

regulations) provide a measure of protection to lay representatives against 
prosecution under state unauthorized practice laws, that protection needs to 
be strengthened if significant numbers of additional nonlawyers are to be 
encouraged to provide assistance, particularly assistance in the open market 
to moderate income persons who can afford to pay modest fees . 



74 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

IV. Federal Mass Justice Agencies Have Authority to Authorize 
Nonlawyer Assistance in Administrative Proceedings 

Representation by nonlawyers in formal federal agency proceedings, as 
well as nonlawyers giving advice and assistance with forms prior to formal 
appearance is not a novel concept. Indeed, from the earliest days of 
federal agencies, nonlawyers have provided representation - even in trial 
type adjudications in many agencies. ^^ In fact, nonlawyer practice at all 
levels of agency action has been the norm from the inception of the Patent 
Office, the Internal Revenue Service and the Interstate Commerce Commission, 
among others. -^-^ 

One of the earliest provisions for nonlawyer representation involved 
veterans benefits. In 1862, Congress provided that both lawyers and 
nonlawyer agents could assist Civil War veterans seeking disability 
benefits, a provision that has been extended to cover other war veterans and 
has continued to this day.-*^ 



^^ For contrasting views as to the merits of this historical 
development, see generally Von Baur, The Practice of Non- lawyers Before 
Administrative Agencies , 15 Fed. B.J. 99, 113-115 (1955) and Gellhorn, 
Qualifications for Practice Before Boards and Commissions , 15 U.Cin. L.Rev. 
196 (19A1). 

-'■^ The Patent Office's first admission requirements were issued in 
1869 and provided that "any person of intelligence and good moral character 
may appear as the attorney in fact or agent of an applicant...." Rules and 
Directions for Proceedings in the Patent Office, Sec. 127 (Aug. 1, 1869). 
Although there were many efforts between 1898 and 1938 to limit Patent 
Office practice to lawyers, Congress steadfastly refused to bar nonlawyers. 
A more complete discussion of the legislative history on this point is 
contained in Sperry v. Florida ex rel Florida Bar , supra at 388-396. See 
also Hull V. United States , 390 F.2d 462, 46A-465 (D.C. Cir. 1968) for a 
discussion of efforts after 1938 to limit nonlawyer practice in the patent 
office. 

5^ Act of July lA, 1862, 12 Stat. 568, amended by Act of July A, 186A, 
13 Stat 389. It is an interesting footnote to federal agency history that 
the original 1862 Veterans Disability Benefits statute reflected outright 
antipathy to lawyers. That Act set a $5 fee cap (changed two years later to 
$10) for providing assistance to Civil War Veterans seeking disability 
benefits. The $10 fee cap is still in effect. It is generally acknowledged 
that even though the fee limitation is applied to both lawyers and 
nonlawyers, "the limitation was designed to protect the veteran from 
extortion or improvident bargains with unscrupulous lawyers." Walters v. 



NONLAWYER ASSISTANCE 75 

For some agencies, there is explicit legislative authority for 
nonlawyer practice.-'-' In other agencies, nonlawyer practice has simply 
evolved without express statutory authority. There has been some judicial 
recognition of the notion that an agency's authority to govern practice 
before it may be implied from its general powers to prescribe its rules of 
procedure irrespective of specific legislative authority to regulate 
practice.^" In any event, it is well accepted that Congress has authority 
to empower federal agencies to issue rules governing practice before them, 
and courts have not attempted to interfere with that legislative 
authority.^' 



National Association of Radiation Survivors , supra . Note 5 at 3210 
( dissenting op. Justice Stevens) and see historical references cited therein 
at 3210, note 5. Justice Stevens presents a persuasive argument that the 
fee limitation provision was not originally intended to exclude all lawyer 
representation (which is its near effect today as a practical matter). He 
notes that a $10 fee in 1864 is equivalent to $580 today and that it is more 
likely that Congress intended to impose that amount as a reasonable fee cap 
than to exclude lawyers from representation of veterans altogether. (Id. ) 
In any event, the practical effect of the fee cap is to limit all 
representation for fee - from both lawyers and nonlawyers. 

The majority in Walters upheld the $10 fee limitation against a 
challenge that it unconstitutionally precluded representation by lawyers. 
The majority found that the record did not show that veterans were harmed by 
nonlawyer representation. Justice Stevens dissented and argued that whether 
or not lawyers would be more successful in veterans proceedings than 
nonlawyers, the fee limitation limits the free choice of representative and 
that limitation is both harmful and an unconstitutional infringement of 
individual liberty. 

^^ For example the Patent Act, 35 U.S. C. 31 expressly authorizes the 
Patent Office to issue rules admitting lawyers and nonlawyers and the 
Attorney Practice Act, 5 U.S.C. 500 expressly entitles certified public 
accountants to practice as a matter of right before the Internal Revenue 
Service. In addition, the enabling statutes for some welfare programs 
expressly provide for representation by nonlawyers. 

^^ See Goldsmith v. United States Board of Tax Appeals , 270 U.S. 117, 
122 (1926); Herman v. Dulles , 205 F.2d 715 (D.C. Cir. 1953). In Sperry v. 
Florida ex rel Florida Bar , supra , the Supreme Court, in discussing 
Congressional ratification of prior agency practice, appears to acknowledge 
the implied authority of agencies to regulate practice before them. See 
discussion, infra, at text of note 60. 

'^' Conversely, not all state courts have agreed that state 
legislatures have authority to empower state administrative agencies to 
permit lay representation. See Comment, 15 Valparaiso Univ. L. Rev. , supra , 
note 38. 



76 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

The legislative history of the Administrative Procedure Act reveals 
that at the time of its enactment in 1946, Congress continued to believe 
that agency practice should not be limited solely to lawyers in spite of the 
fact that by then administrative agency decisions had proliferated and there 
were increased urgings by the organized bar to exclude nonlawyers. 

The Chairman of the American Bar Association's Committee on 
administrative law had testified in 19A5 before the House Judiciary 
Committee Hearings on proposed bills dealing with administrative procedure 
that: 

"(T)here is a great deal of protest from the 
committees on unauthorized practice of the law in various 
State, local and municipal bar associations who are just as 
vehement in saying that these measures fail to recognize that 
legal procedure must be confined to lawyers. ° 

In fact, the extent to which nonlawyers should be allowed to practice before 
federal administrative agencies was vigorously debated both in and out of 
Congress for more than a decade. As early as 1941, the Attorney General's 
Committee on Administrative Practices examined the need for various reforms 
in administrative agencies. Its report stated that "(e)specially eimong 
lawyers' organizations there has been manifest a sentiment in recent years 
that only members of the bar should be admitted to practice before 
administrative agencies. The Committee doubts that a sweeping interdiction 
of nonlawyer practitioners would be wise..."-'^ 

The debate over the role of nonlawyers in federal agency practice 
continued throughout the deliberations leading to the passage by Congress of 



-*° Hearings before House Committee on the Judiciary on Federal 
Administrative Procedure, 79th Cong., 1st Sess. (Serial No. 19) 33-3A, 
Legislative History of the Administrative Procedure Act, S.Doc. No. 2A8, 
79th Cong., 2d Sess. 79-80. 

-*^ Attorney General's Committee on Administrative Procedure, Final 
Report 12A (1941) (quoted in Sperry v. Florida ex rel Florida Bar , supra , at 
396). 

A more recent example of the belief that agency practice should be 
restricted to lawyers occurred during comments to the proposed rules of the 
Immigration and Naturalization Service to revise its procedures concerning 
the accreditation of nonprofit agencies to assist persons in INS 
proceedings. The agency reported that the most severe adverse comments came 
from those who expressed the view that agency practice should be limited 
entirely to lawyers. Department of Justice Summary of Final Rule, Request 
for Recognition: Accreditation of Representatives, 49 Fed. Reg. (No. 214) 
44085, Nov. 2, 1984. Final Rule published in 8 C.F.R. Pt. 292.2 (Dec. 3, 1984) 



NONLAWYER ASSISTANCE 77 

the Administrative Procedure Act in 1946.°^ The final outcome, as stressed 
by the Supreme Court in its unanimous Sperry decision was that "(d)espite 
protests of the bar. Congress in enacting the Administrative Procedure Act 
refused to limit the right to practice before the administrative agencies to 
lawyers. "^^ Rather, as the Court noted. Congress determined that it would 
continue in effect the then existing practice of allowing each agency to 
determine for itself whether, and under what conditions, nonlawyers would be 
admitted to the bar of the agency. ^^ Accordingly, Congress provided in 



^^ During house debates on the matter of lay representation, the 
following illustrative exchange occurred. (92 Cong.Rec. 2156; Legislative 
History of the Administrative Procedure Act, S.Doc. No. 248, 79th Cong., 2d 
Sess. 316-317): 

"Mr. Austin: [I] notice... in the section to which the 
Senator is referring, this language: 

'Nothing herein shall be construed either to grant or to deny 
to any person who is not a lawyer the right to appear for or 
represent others before any agency or in any agency proceeding.' 

Is it not a fact that somewhere in the bill the distinguished 
Senator has reserved the right to a non-professional -- that is, a 
man who is not a lawyer --to appear, if the agency having 
jurisdiction permits it? For example, take a case where a 
scientific expert would better represent before the Commission the 
interests involved than would a lawyer. The right to obtain that 
privilege is granted in the bill somewhere, it is not? 

Mr. McCarran: The Senator is correct; and in connection with 
that I wish to read from the Attorney General's comment, as 
follows: 

'This subsection does not deal with, or in any way qualify, 
the present power of an agency to regulate practice at its bar.""* 
Control over this matter remains in the respective agencies." 

^1 Sperry v. Florida ex rel Florida Bar , supra , at 388. A review of 
the legislative history of the Administrative Procedure Act provision 
dealing with nonlawyer representation is contained in Sperry at 396-399. 
Also see The Attorney General's Manual on the Administrative Procedure Act, 
particularly pp. 62, 65, discussed in the text at note 63, infra . 

^^ Congress also determined at the time of enactment of the APA to 
continue to allow federal agencies to establish requirements for the 
admission of lawyers (even though bar groups had objected to this practice) 
and it defeated an amendment to the Administrative Procedure Act introduced 
on the floor of the House which would have abolished agency admission 



78 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

Section 6(a) of the 19A6 Act dealing with "ancillary matters" that agencies 
could, in their discretion, authorize nonlawyer representation. The current 
version of this provision is not substantively different from the original 
6(a) and is now set forth in Section 555(b) of the Administrative Procedure 
Act, 5 U.S.C. 555(b) (1977). It provides as follows: 

A person compelled to appear in person before an 
agency or representative thereof is entitled to be 
accompanied, represented, and advised by counsel or, if 
permitted by the agency, by other qualified representative. 



requirements for lawyers. See Attorney General's Manual , supra , p. 65. 
Subsequently, many agencies discontinued the practice of imposing admission 
requirements on licensed attorneys, and in 1965 Congress enacted the Agency 
Practice Act. 5 U.S.C. 500, which admits attorneys as a matter of right to 
practice before all federal agencies with the exception of the Patent and 
Trademark Office. (Certified pubic accountants were also entitled to a 
right to practice before the Internal Revenue Service.) 

In enacting the Agency Practice Act Congress also provided that 
agencies could continue to set admission requirements for nonlawyers and 
reaffirmed the earlier Congressional intention set forth in 5 U.S.C. 555(b) 
to give agencies discretionary authority over the question of nonlawyer 
admission. Thus, the Attorney Practice Act expressly provides that the 
statute "does not grant or deny to an individual [who is not a lawyer or a 
C.P.A.] the right to appear for or represent a person before an agency or in 
an agency proceeding." The agencies retain their authority under the Agency 
Practice Act to regulate the conduct and impose discipline on both attorneys 
and laypersons after their admission to practice. Sen. Comm. on the 
Judiciary, Report to Accompany S. 1758 , S.Rep. No. 755, 89th Cong., 1st Sess 
(1965); House of Representatives Comm. on the Judiciary, Report to Accompany 
S. 1758 , H.R. Rep. No. IIAI, 89th Cong., 1st Sess (1965) reprinted in 1965 
U.S. Code Cong, and Admr. News, 89th Cong., 1st Sess. at A170. 

Bar groups have objected to federal agency authority to discipline 
lawyers, but thus far agencies have retained this authority. A committee of 
the Administrative Conference of the United States stated in a report that 
"agencies ought to have authority to discipline attorneys to maintain the 
integrity of their own proceedings...." Administrative Conference Comm. on 
Government Processes, Report Concerning Discipline of Attorneys Practicing 
Before Federal Agencies , 1982 ACUS (Vol. II) 488 (198A). Also see Cox, 
Regulation of Attorneys Practicing Before Federal Agencies , Report to the 
Administrative Conference of the U.S., 34 Case Western Reserve L.Rev. 173 
(1984). The Conference adopted a statement in 1982 that any problems 
concerning attorney discipline before federal agencies were not of such a 
magnitude as to require changing the statutory authorization or adoption of 
uniform federal standards. 1 C.F.R. 310.8. 



NONLAWYER ASSISTANCE 79 



This subsection does not grant or deny a person who is 
not a lawyer the right to appear for or represent others 
before an agency or in an agency proceeding. 

The Attorney General's Manual on the Administrative Procedure Act, 
published in 1947, is the principal guide to the legislative intent of the 
APA. The Manual explains the legislative intent regarding Section 6(a) as 
follows: 

The phrase "or, if permitted by the agency, by other 
qualified representative" refers to the present practice of 
some agencies of permitting appearance or representation in 
certain matters by nonlawyers, such as accountants. The 
phrasing of this clause, together with the last sentence of 
the subsection, makes it clear that nothing in the first 
section was intended to change the existing powers of 
agencies in this respect. 

'k 'k -k 

The last sentence of section 6(a) provides that 
"Nothing herein shall be construed either to grant or to deny 
to any person who is not a lawyer the right to appear for or 
represent others before any agency or in any agency 
proceeding." The question of the extent to which nonlawyers 
should be permitted to practice before administrative 
agencies was deliberately left to the determination of the 
various agencies, as heretofore. House Hearings (1945) p. 34 
(Sen. Doc. p. 80); H.R.Rep. p. 32 (Sen. Doc. p. 265).^^ 



°-^ Although the Attorney General's Manual notes that the first 
sentence of Section 6(a) dealing with the right of a party to counsel "does 
not extend to persons who appear voluntarily," the provision as a whole is 
generally interpreted to authorize lay representation in all proceedings, 
including "voluntary" appearances to apply for government benefits or 
grants, if lay representation is permitted by the agency. This broad 
interpretation is in accord with the expressed legislative intent noted by 
the Attorney General not to change the then existing practice of nonlawyer 
representation in a wide range of agency proceedings, which included at the 
time "voluntary" patent applications and applications for veterans 
disability benefits. 

Even in cases presenting the issue of whether a party is entitled to 
counsel, rather than the right of practice before the agency, the provision 
has often been broadly and liberally interpreted to require an agency to 
permit representation of choice in a broad range of administrative 
proceedings. See , for example, Coyle v. Gardner , 298 F.Supp. 609 (D.Hawaii 



80 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

In accordance with the general authorization provided in Section 
555(b) of the Administrative Procedure Act (and, in some cases, under the 
additional authority of specific statutes, such as those authorizing 
nonlawyer practice before the Internal Revenue Service and the Social 
Security Administration) the great majority of federal agencies today permit 
at least some degree of nonlawyer representation in both adversarial and 
nonadversarial proceedings. ^ As we shall see in the following section of 
this report, however, nonlawyer representation does not occur frequently as 
a matter of actual practice. 

Some commentators have noted that one historical rationale for 
admitting nonlawyers to practice before agencies such as the Patent Office 
and the Internal Revenue Service was the belief that certain categories of 
nonlawyers had highly specialized skills and knowledge enabling them to 
provide especially competent representation, and indeed, were often more 
likely to have the requisite specialized knowledge than were lawyers."^ 
Senator Austin's statement in the debates on the APA that sometimes "a 
scientific expert would better represent before the Commission the interests 



1969) (applicant for social security benefits entitled under this section to 
choice of counsel, his wife, at hearing before examiner). The Court in 
United States v. Smith , 87 F.Supp. 293 (D.C. conn. 19A9) expressed the view 
that since the section 

"is intended to establish uniform standards of fairness for 
dealings of administrative bodies with the citizens, courts 
should prefer a broader interpretation where two 
interpretations are possible of this section, one of which 
would narrow, the other broaden, the categories of the 
citizens touched by the administrative process to which the 
protection is extended." 

Conversely, the Immigration and Naturalization Service takes the position 
that in those proceedings where persons are not "compelled" to appear, they 
are not entitled as a matter of right to assistance of a nonlawyer and 
hearing officers may exercise discretion in deciding whether to admit a 
nonlawyer representative. 

°^ See 198A Survey of Nonlawyer Practice Before Federal Administrative 
Agencies , a survey by the standing Committee on Lawyers Responsibility for 
Client Protection and the American Bar Association Center for Professional 
Responsibility, a copy of which is attached to this report as Appendix A. A 
similar survey of agencies was conducted by Professor Jonathan Rose and 
included as an Appendix to his report to the Administrative Conference. See 
Note 1 , supra . 



65 



Rose, note 1, supra at 26, and notes cited therein, 



NONLAWYER ASSISTANCE 81 

involved than would a lawyer" reflect that sentiment. ° This "highly 
specialized competence" explanation is not as apt, however, with respect to 
the early authorization for lay representation in mass justice agencies such 
as the Veterans Administration where specialized competence in helping 
veterans apply for disability benefits was not a factor in the statutory 
encouragement of nonlawyer assistance. 

Another plausible explanation for the early admission of nonlawyers 
to federal agency practice is that bar groups did not at first vigorously 
resist the use of lay practitioners because large numbers of lawyers had not 
yet themselves developed specialized federal agency practices (and perhaps 
did not view representation before agencies as "lawyering")."' 

Still another explanation for the historical admission of nonlawyers is 
that many agency proceedings were viewed in their earliest days as offering 
essentially informal, non-legalistic and often nonadversarial processes where 
formal rules of evidence and procedure would be largely inapplicable. °° Early 
evaluations of federal agency procedures as essentially informal non- legal 
processes have, of course, been substantially modified as many agency 



"° See note 60, supra . This view finds some support in the history of 
the earliest agencies. As early as 1915, the Commissioner of Patents wrote 
in his Annual Report: 

"Fundamentally, knowledge of the invention is more 
important than knowledge of the rules and is often possessed 
by men of a type of mind which does not acquire legal 
knowledge readily." 

Commissioner of Patents, Annual Report xiv (1915), quoted in Sperry v. 
Florida ex rel Florida Bar , supra , at 392. 

This view has also been expressed occasionally in court decisions. For 
example, in Auerbacher v. Wood , 53A.2d 800, 802 (N.J.Eq. 19A7) aff 'd 59 A. 2d 
813 (N.J.Eq. 1948), a case involving an industrial relations consultant's 
practice before the National Labor Relations Board, the court opined that 
factual knowledge of industry is often more important in labor relations 
than legal knowledge. 

°' Many commentators have been highly critical of the Bar's efforts 
during this century to limit administrative agency practice to lawyers and 
see in these efforts a bald attempt to establish a laywer's monopoly. See 
Rose, note 1 supra , at 2; Morgan, The Evolving Concept of Professional 
Responsibility , 90 Harv.L.Rev. 702 (1977); Comment: Unauthorized Practice 
of Law: Supreme Court Holds States Cannot Restrict Activities on Nonlawyer 
Patent Office Practitioner , 1964 Duke L.J. 190; Rhode, note 81, infra . 

"° See Gellhorn, Qualifications for Practice Before Boards and 
Commissions, 15 U.Cin.L.Rev. 196 (1941). 



82 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

proceedings have in fact become considerably more complex, as the doctrine of 
property rights in governmental benefits has developed ( see e.g . , Goldberg v. 
Kelly , 397 U.S. 25A (1970)); as lawyers have become increasingly involved in 
federal agency practice and as that practice has spawned an ever increasing 
volume of judicial review. Notwithstanding these developments, the federal 
statutory framework has continued to accommodate nonlawyer representation - 
both through Section 555(b) of the Administrative Procedure Act and through 
other statutes authorizing lay representation before specific agencies."" 

In mass justice agencies particularly, accommodation of nonlawyer 
representatives - at least at lower levels of agency decision-making - continues 
to make practical sense in light of the fact that many proceedings in those 
agencies are still fairly routine and informal. Even in proceedings where the 
issues are somewhat more complex, or are a mixture of fact and law, and even 
where the proceedings are adversarial, this study has determined (as 
discussed above in Part III) that nonlawyers can provide competent 
representation . 



"^ See note 55 supra . 



I 



I 



NONLAWYER ASSISTANCE 83 

V. Federal Law and Mass Justice Agency Regulations Do Not Maximize 
The Potential For Increased Nonlawyer Professional Assistance 
Because They Do Not Adequately Protect Nonlawyer Professionals 
From State Unauthorized Practice Laws 

Despite Congressional authority to permit nonlawyer representation in 
administrative proceedings, agencies have not uniformly encouraged that 
representation, and there has been little guidance in the matter from either 
Congress or the Executive offices. As a result, even though most agencies 
permit nonlawyer representation as a matter of principle, in only a handful 
of agencies is nonlawyer assistance common as a matter of actual practice. 
This finding emerges from three sources: interviews and statistical data 
obtained in connection with this study; interviews and statistical data 
siimmarized in a 1984 study by the American Bar Association's Standing 
Committee on Lawyers' Responsibility for Client Protection and the American 
Bar Association Center for Professional Responsibility (hereinafter referred 
to as the American Bar Association Committee report); and interviews and 
statistical data obtained by Professor Jonathan Rose and set forth in his 
unpublished report to the Administrative Conference of the United States on 
April 9, 1984.'^ A copy of the American Bar Association report is attached 
to this paper as Appendix A. 

The American Bar Association Committee received responses from 97% of 
the thirty-three federal agencies surveyed. Most of the agencies responding 
reported that they permit nonlawyer representation, at least in some 
circumstances, and they also reported that they permit nonlawyer 
representation in both adversarial and non-adversarial proceedings.'^ 
Nonetheless, the American Bar Association Committee found that while the 
great majority of agencies allow nonlawyer representation in principle, 
"most of them seem to encounter lay practice very infrequently."''^ 
Nonlawyer practitioners were reported to appear overall in only 5% of 
adjudications.'-^ In general, mass justice agencies reported higher levels 
of nonlawyer representation than did other agencies.'^ 



70 The American Bar Association Committee report was published in 
February, 1985. Professor Rose's study, note 1, supra , focused on nonlawyer 
representation in economic regulatory proceedings. It identified fourteen 
federal agencies which did not permit any nonlawyer representation. 



at 1. 



71 American Bar Association Client Protection Committee Report, supra , 

72 Id^ 

73 Id. 



74 



Id, 



84 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

The findings of the American Bar Association Committee with respect to 
mass justice agencies are generally consistent with those of the Rose 
report. Note 1, supra and with those obtained in connection with this 
report. The findings for the agencies examined in this report can be 
summarized as follows: 

Internal Revenue Service 

As noted in Section III of this report, the Internal Revenue Service 
does not maintain statistics on the category of representatives in 
proceedings before it, but it reports that a very large number of nonlawyers 
are registered to practice before the agency, and that in fact nonlawyer 
representation is very common. ^ 

The Veterans Administration 

As also noted previously in this report, the statutory $10 fee cap on 
veterans' disability benefit claims has effectively deterred lawyers from 
providing representation in these matters. (This is the largest category of 
cases requiring assistance in the Veterans Administration.) The $10 fee cap 
also deters nonlawyers from providing representation for fees. The Veterans 
Administration reports that there is a long tradition of free assistance to 
veterans provided by military service organizations and other nonprofit 
agencies such as the American Red Cross, and that these organizations 
provide assistance in 86% of the disability claims cases.'" 

The Immigration and Naturalization Service 

The Immigration and Naturalization Service does not maintain 
statistics on representation, but agency personnel report that while there 
is a substantial amount of assistance provided by nonlawyers, the nonlawyers 
are all employees of nonprofit agencies or relatives and friends appearing 
without fee on a one-time basis. It is widely estimated that large numbers 
of persons in INS proceedings are completely unrepresented.'' 

The Social Security Administration 

The Social Security Administration permits nonlawyer representation 
in both adversarial and nonadversarial proceedings. Nonlawyer 
representatives are also entitled to receive fee awards. However, nonlawyer 
representation constituted only 11.2% of the representation in all social 
security requests for hearing matters in 1983. (Another l.A% of the matters 
included nonlawyers appearing jointly with lawyers.) Lawyers provided 



'-^ See text at note 29, supra . 

76 See note 28, supra . 

77 See note 27, supra . 



NONLAWYER ASSISTANCE 85 

representation in 50.5% of the matters, and claimants in approximately 38% 
of the matters were unrepresented. ° Although the Social Security 
Administration does not maintain data on the employment status of 
nonlawyers, persons interviewed in connection with this study generally 
agreed that the overwhelming majority of nonlawyers were relatives and 
friends appearing without fee on a one-time basis or paralegals and other 
employees of nonprofit organizations. 

The principal reason for the low incidence of lay representation 
overall, and the virtual non-existence of lay representation for fee in mass 
justice agencies (with the exception of the Internal Revenue Service) is 
that many agencies have not issued clear regulations or adopted other 
measures to implement the authority of Section 555(b) of the Administrative 
Procedure Act and to encourage nonlawyer representation, particularly 
representation for fee.'^ Section 555(b) is not self -executing. The right 
of nonlawyers to practice before each agency must be determined by reference 
not only to Section 555(b) of the Administrative Procedure Act but also "by 
reference to the statute and regulations applicable to the particular 
agency." Sperry v. Florida ex rel Florida Bar , supra , at 397. While the 
APA authorizes agencies to allow nonlawyer representation (and, as we have 
seen, it was not the intention of Congress to discourage that 
representation), each agency ordinarily has the final decision on whether - 
and to what extent - nonlawyers will be permitted or encouraged to provide 
representation before it since few agencies are governed by statutes 
compelling or banning legal representation. °^ 

Most importantly of all, if agency regulations and other agency 
measures do not unambiguously authorize laypersons to practice before the 



'° These statistics were prepared by the Social Security 
Administration's Office of Hearing Appeals, and published in May, 198A in 
Participant Involvement in Request for Hearing Cases for Fiscal Year 1983 . 
A copy of this report is attached to this paper as Appendix B. 

'^ Implementation of the statute can include, in addition to the 
issuance of clear regulations, measures such as the establishment of 
registers, administration of examinations, imposition of experience 
criteria, imposition of fee award criteria, and licensing or certification 
procedures. A few agencies, including the Internal Revenue Service and the 
Patent Office,- have adopted some of these others measures. The Immigration 
and Naturalization Services has imposed competence criteria but only for 
employees of nonprofit organizations. See discussion in text at notes 109- 
111, infra. 

°^ There are a few instances in which a federal statute affects the 
scope of an agency's authority to govern practice before it. For example, 
the Attorney Practice Act, 5 U.S.C. 500, entitles CPAs to practice before 
the Internal Revenue Service (and lawyers to practice as a matter of right 
before all federal agencies except the Patent Office). 



86 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

agency, including all activity leading up to and incidental to that 
representation, nonlawyers attempting to provide assistance may be in 
jeopardy of prosecution under state laws and court rules prohibiting 
unauthorized practice of law. Agency failure to provide protection against 
state unauthorized protection laws has been the single most chilling 
deterrent to the development of nonlawyer specialists to assist low and 
moderate income persons in the immigration and social security fields. This 
problem cannot be overstated. One cannot address the problem of inadequate 
numbers of lay assistants to help low and moderate income persons in mass 
justice agencies and ignore the very real problem of the adverse impact on 
lay representation of state unauthorized practice laws, and the equally real 
problem of fear of prosecution under those laws. 

The longstanding conflict between state bar unauthorized practice 
committees and nonlawyer groups over what constitutes the "practice of law" 
is well-known and this paper will not dwell unduly on that subject. Suffice 
it to say that numerous nonlawyers and nonlawyer entities, including real 
estate brokers, collection agencies, banks, accountants, publishing houses, 
title companies, insurance companies, and social workers, among others, have 
all been subiected at one time or another, in one jurisdiction or another, 
to charges of unauthorized practice of law.°^ One knowledgeable observer 
has written that appearances before specialized administrative agencies are 
one of the "five or six major areas [which] continue to be the primary 
source of controversy . "°^ A 1980 survey of state bar unauthorized practice 
enforcement committees revealed that lay representation before 
administrative agencies (state and federal) accounted for 5% of bar 
committee investigations in 1979 and for 10% of the reported judicial 
decisions between 1970 and 1980. (Only two decisions were reported in the 
decade between 1970 and 1980 recognizing a right to lay representation 
before administrative agencies. )°^ 



°^ Many articles have been written critically examining the volumes of 
state unauthorized practice decisions. See, for example, Rhode, Policing 
the Professional Monopoly; A Constitutional and Empirical Analysis of 
Unauthorized Practice Prohibitions , 3A Stan. L. Rev. 1 (1981); Christensen, 
The Unauthorized Practice of Law; Do Good Fences Really Make Good Neighbors 
- Or Even Good Sense? 1980 Am. B. Found. Research J. 159; Comment, 15 
Valparaiso L.Rev ., supra , note 38; Weckstein, Limitations on the Right to 
Counsel; The Unauthorized Practice of Law , 1978 Utah L.Rev. 6A9; Morgan, 
The Evolving Concept of Professional Responsibility , 90 Harv. L.Rev. 702 
(1977); Johnstone, Unauthorized Practice Controversy, A Struggle Among Power 
Groups , A Kan. L.Rev. 1 (1955); See generally, J. Fischer & D. Lachman, 
Unauthorized Practice Handbook; A Compilation of Statutes, Cases and 
Commentary on the Unauthorized Practice of Law (1972). 

82 Morgan, id, at 708. 

83 Rhode, note 81, supra , at 78. 



NONLAWYER ASSISTANCE 87 

The struggle between lawyers and nonlawyers has been longstanding, 
and exceedingly difficult to resolve. In significant part, this is because 
of the inherent difficulties in arriving at a definition of what constitutes 
"the practice of law."°^ In order to reach an accommodation with some of 
the country's major non-legal entities, the American Bar Association in 1969 
published a book of agreements between the Association and ten professional 
groups. ^ The preamble to the agreement with the Council of Certified 
Public Accountants testifies to the difficulty in separating the "practice 
of law" from other non- legal activities - in this particular case, tax 
accounting: 

In our complex society, the average citizen conducting a 
business is confronted with a myriad of governmental laws 
and regulations which cover every phase of human endeavor 
and raise intricate and perplexing problems. These are 
further complicated by the tax incidents attendant upon all 
business transactions. As a result, citizens in increasing 
numbers have sought the professional services of lawyers 



°^ The Stanford Survey of reported unauthorized practice decisions 
between 1970 and 1980 found that the reasoning in those cases was circular 
or conclusory or both. Id. , at 97. Because of the extreme difficulty in 
arriving at a definition of the practice of law, some courts have simply to 
define the practice of law generally. This has often led to confusing and 
inconsistent results. Compare, for example, Clark v. Austin , 101 S.W.2d 
977, 982 (1937) (layperson appearing before state public service commission 
was engaged in unauthorized practice) with Auerbacher v. Wood , 53 A. 2d 800, 
801 (N.J. Eq. 19A7), aff'd. 59 A. 2d 863, 86A (N.J. Eq. 194) (industrial 
relations consultant appearing before National Labor Relations Board was not 
practicing law but only using his legal knowledge incidentally to provide 
non-legal services.) For a discussion of these and other cases, see Rhode, 
Id. , and Comment, 15 Valparaiso L. Rev. , supra , note 38. 

°-* The American Bar Association Statements of Principles with Respect 
to the Practice of Law Formulated by Representatives of the American Bar 
Association and Various Business and Professional Groups (1969). These 
statements of Principles were subsequently withdrawn because of antitrust 
concerns. See Rose, note 1 supra at ...; Interview with H. William Allen, 
Chairman of the American Bar Association's Committee on National Conference 
Groups. The Statements of Principles are discussed in Comment, Valparaiso 
Univ. L. Rev. , supra , note 38. 

It is interesting to note that, as a general matter, nonlawyers who 
are members of organizations with the wherewithal to contest unauthorized 
practice laws - e.g., banks and insurance companies - over the years have 
worked out accommodating arrangements with bar groups. Nonorganized 
individuals attempting to assist low and moderate income persons before 
state mass justice agencies have generally not fared as well. See, for 
example, cases discussed at note 88, infra, and see text at notes 88-89, infra. 



88 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

and certified public accounts. .. Frequently the legal and 
accounting phases are so interrelated and interdependent 
and overlapping that they are difficult to distinguish. 
Particularly is this true in the field of income taxation 
where questions of law and accounting have sometimes been 
inextricably intermingled. 

The statement on unauthorized practice in Ethical Consideration 3-5 
of the American Bar Association's Code of Professional Responsibility, which 
was adopted by most of the states after its promulgation in 1969, and is 
still in effect in many states, adds little to the definition of the 
practice of law. It states: 

It is neither necessary nor desirable to attempt the 
formulation of a single, specific definition of what 
constitutes the practice of law. Functionally, the 
practice of law relates to the rendition of services for 
others that call for the professional judgment of a lawyer. 

The Model Code's Disciplinary rule, D.R. 3- 10(A) subjects a nonlawyer to 
disbarment or other discipline if the lawyer provides "aid to a nonlawyer in 
the unauthorized practice of law." The American Bar Association revised its 
Model Code and adopted new Model Rules of Professional Conduct on August 2, 
1983. The new Model Rules drop the text of Ethical Consideration 3-5 and no 
longer attempt even a general definition of the practice of law. The new 
Model Rules continue, however, to subject lawyers to discipline if they 
"assist a person who is not a member of the bar in the performance of any 
activity that constitutes the unauthorized practice of law." (Model Rule 
5. 5). 86 



86 The new Model Rules also continue the old Model Code ban on a 
lawyer forming a partnership with a nonlawyer if any part of the partnership 
consists of "the practice of law." Compare Model Rule 5.A(b) and 
Disciplinary Rule 3-103(A) of the Model Code. 

The "Legal Background" section to ABA Model Rule 5.5 reviews the 
exceptions "in which an unlicensed individual is permitted to engage in an 
activity that clearly constitutes the practice of law and would otherwise be 
prohibited if engaged in by an unlicensed individual. Examples of such 
activity include. . .activities authorized by federal law e.g., Sperry v. 
Florida...." The Legal Background section commentary notes that the 
excepted activity would not be considered the unauthorized practice of law 
and conclvdes: "Accordingly, the ABA Model Rules do not prohibit a lawyer 
from assisting an unlicensed individual in one of these authorized 
activities. " 

Unfortunately, the effectiveness of this statement is undercut by the 
fact that the ABA's introductory section on the scope of the Model Rules 
stresses that the Legal Background notes "have not been adopted, do not 



NONLAWYER ASSISTANCE 89 

Similarly, while the Model State Administrative Procedure Act permits 
lay representation, it does so only if the representation is not prohibited 
under state unauthorized practice laws. The Model Act does not attempt to 
define unauthorized practice, but, rather, leaves it to the various states 
to determine. ^ While many states do allow lay practice before state 
administrative agencies, a number do not.°° A 1980 study focused on 
representation before particular kinds of state administrative agencies and 
surveyed all fifty states. With respect to Workers' Compensation Boards, 
the survey disclosed that only twenty of fifty Boards permitted lay 
representation. The same study found that except in California, every state 
court to consider the issue between 1970 and 1980 had denied nonlawyers the 
right to practice before Workers' Compensation Boards. °" 

Federal administrative agency practice has not been spared from state 
court litigation over the issue of what constitutes the practice of law and 
whether it extends to practice before federal agencies. Practice before the 
United States Patent Office and the Internal Revenue Service were among the 



constitute part of the Model Rules, and are not intended to affect the 
application or interpretation of the Rules...." Neither the relatively more 
authoritative "Comment" to the Rules, nor the Rules themselves, state that 
authorized federal agency practice is not the unauthorized practice of law. 

85 See Model State Administrative Procedure Act, Sec. 4-203(b) and 
Comment (1981). 

88 Compare Florida Bar v. Moses , 380 So. 2d A12, A17 (1980) which 
permitted lay representation (contract negotiator for school board in public 
employees relations commission hearing) with Chicago Bar Ass'n v. Goodman , 
366 111. 346, 8 N.E.2d 941, cert, denied 302 U.S. 728 (1937) which barred 
lay representation (before the state's industrial commission dealing with 
workmens' compensation issues.) 

Some state courts have insisted that because control over the 
practice of law is inherently a function of the state's judicial branch, 
only the state's supreme court can authorize practice before state 
administrative agencies. See e.g. , West Virginia State Bar v. Earley , 109 
S.E. 2d 420, 435 (W.Va. 1959) (statute authorizing state compensation 
commissioner to adopt rules of procedure did not authorize him to issue 
rules permitting nonlawyer practice.) A critical appraisal of this case and 
other similar state cases is set forth in Comment, Valparaiso Univ. L. Rev. , 
Note 38, supra . 

89 Rhode, Note 81, supra at 78. (The study also found that only 
eleven of fifty public utility commissions permitted lay representation 
generally. Another twenty-two commissions permitted only corporate counsel 
or agents of participating utilities and other companies.) 



90 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

early subjects of unauthorized practice litigation in state courts. ^ 
However, the unauthorized practice debate over representation in federal 
agencies has now subsided with respect to practice before several of the 
federal administrative agencies. This has happened where the agencies have 
issued clear regulations permitting lay representation, and as state courts 
have increasingly recognized the authority of the federal agencies to do so 
under the Administrative Procedure Act and Supreme Court preemption 
decisions . 

The leading Supreme Court preemption decision in the area of 
nonlawyer practice before federal agencies is Sperry v. Florida ex rel 
Florida Bar , 373 U.S. 379 (1963). The Sperry case involved a 1952 federal 
statute, 35 U.S.C. 31, which provided generally that the Commissioner of 
Patents 



(m)ay prescribe regulations governing the recognition and 
conduct of agents, attorneys or other persons representing 
the applicants or other parties before the Patent 
Office 

Pursuant to this general statutory authority, the Commissioner issued 
regulations allowing an applicant for patent to be represented by an 
attorney or agent and also established two separate registers, one for 
attorneys and one for nonlawyer "agents." 



The Florida Bar brought suit against a patent agent who maintained an 
office in Florida and held himself out to the public as available to preoare 
patent applications even though he was not a member of the Florida Bar.^^ 
(The record revealed that of the 73 patent practitioners in Florida at the 



90 See, e.g. , Sperry v. Florida ex rel Florida Bar , supra (reversing 
the Florida supreme Court's finding of unauthorized practice against a 
nonlawyer patent agent; Ginsburg v. Kovrak , 139 A. 2d 889, appeal dismissed , 
79 Pa. Sup. Ct. 95 (1958) and Petition of Kearney , 63 So. 2d 630 (Fla. 1953) 
(refusing to allow attorneys admitted to federal courts but not to state 
courts to practice "tax law"). For a discussion of state efforts to bar 
practice before federal agencies, see Rose, note 1, supra ; Simonelli, State 
Regulation of a Federal License to Practice Law; Unauthorized Practice or 
Federal Supremacy , 31 Fed. Bar News & J. 128 (1984); Comment, Unauthorized 
Practice of Law; Supreme Court Holds States Cannot Restrict Activities of 
Nonlawyer Patent Office Practitioner , 196A Duke L.J. 190. 

91 The patent agent had also advertised himself as a "patent 
attorney," but he had ceased to do so and the issue of whether he could call 
himself a patent attorney rather than patent agent was not before the Court. 
Subsequently, U.S. Patent Office rules have made it clear that nonlawyers 
may not advertise themselves to be attorneys. 



\ 



NONLAWYER ASSISTANCE 91 

time, 62 were not members of the Florida Bar.)"^ The record established 
that Mr. Sperry prepared legal documents, rendered opinions as to 
patentability, and filed applications in the U.S. Patent Office. The 
Florida Bar contended that these actions constituted the unauthorized 
practice of law. In a unanimous decision, the Supreme Court held that the 
state was preempted from interfering with the agent's practice, including 
that part of the practice in Florida which was incidental to the preparation 
and prosecution of patent applications before the Patent Office, because of 
the Court's longstanding interpretation of the Constitution's Supremacy 
Clause that state laws must yield when incompatible with lawful federal 
legislation.^-' The Supreme Court found that the Patent Commissioner's 
action in issuing regulations and establishing a register under the general 
authority of the federal statute constituted preemptive action by the 
federal government. Moreover, the Sperry opinion implies that even in the 
absence of a Congressional statute expressly authorizing nonlawyer practice, 
an agency has discretionary authority to permit that practice so long as it 
is not prohibited by Congress. The opinion does not expressly discuss the 
doctrine of implied authority or the inherent powers of agencies, but it 
does refer specifically to the historical practice of federal agencies to 
govern conduct of practitioners and the legislative history of the 
Administrative Procedure Act in which Congress evidenced its intention not 
to interfere with that longstanding practice. 

The Supreme Court did not attempt in Sperry to delineate the outer 
limits of the federal government's authority to allow federal agency 
practice in the several states, noting in a footnote that it was not 
necessary to do so in the case before it.^^ Nonetheless, the Court made it 
quite clear in the text of its opinion that the federal authority could not 
be as narrowly circumscribed as the Florida Bar attempted and that there are 
some activities incidental to federal agency practice that are "inevitable." 
Thus, the Court stated that preparation and prosecution of patent 
applications: 

inevitably requires the practitioner to consider and 
advise his clients as to the patentability of inventions 
under the statutory criteria. . .as well as to consider the 
advisability of relying upon alternative forms of 
protection which may be available under state law. It also 
involves his participation in the drafting of the 
specifications and claims of the patent application. .. (one 
of the most difficult legal instruments to draw with 
accuracy) .. .And upon rejection of the application, the 



92 Sperry v. Florida ex rel Florida Bar , supra at 401, note A4. 

93 The Sperry Court based its holding on the Supreme Court's former 
seminal supremacy clause ruling in Gibbons v. Ogden , 9 Wheat 1, 211. 

94 Id., at 402, note 47. 



92 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

practitioner may also assist in the preparation of 
amendments. . .which frequently requires written argument to 
establish the patentability of the claimed invention under 
the applicable rules of law and in light of the prior art." 
(Citations omitted) (Emphasis supplied)^-' 

The Court found that these kinds of activities were inevitable in carrying 
out the federal practice even though under state law those same activities 
"constitute the practice of law" and "in the absence of federal legislation, 
[the state] could validly prohibit nonlawyers from engaging in 
this. . . practice. "^^ 

In the footnote commenting that the Court was not called upon to 
determine the ultimate limits of the federal authority, the Court also 
stated: 

We note, however, that a practitioner authorized to prepare 
patent applications must of course render opinions as to 
the patentability of the inventions brought to him, and 
that it is entirely reasonable for a practitioner to hold 
himself out as qualified to perform his specialized work, 
so long as he does not misrepresent the scope of his 
license. (Emphasis added. )^' 

Finally, the Court rejected the Florida Bar's contention that the 
federal authority extended only to activities performed on federal property 
or in the District of Columbia. The Court noted that "The bulk of 
practitioners are now scattered throughout the country" and that "As a 
practical matter, if practitioners were not so located, and thus could not 
so easily consult with the inventors with whom they deal, their 
effectiveness would often be considerably impaired. "^° 

The Court's decision in Sperry does not give federal agency 
practitioners a license to practice law generally. (Patent agents are 
clearly not authorized to draw up wills and trust instruments, for example.) 
In fact, the Court expressly stated that the State "maintains control over 
the practice of law within its borders except to the limited extent 



95 Sperry , id. , at 383. The Florida Court's injunction had 
permanently enjoined Sperry from "rendering legal opinions, including 
opinions as to patentability .. .preparing, drafting and construing legal 
documents. . .holding himself out in this state, as qualified to prepare and 
prosecute applications for letters patent...." 

96 Id^ 

97 Id^ at 402, note A9. 

98 Sperry , supra at 389-90. 



NONLAWYER ASSISTANCE 93 

necessary for the accomplishment of the federal objective.""^ The Court's 
overall decision, and the language of its opinion quoted above, make clear, 
however, that the "limited extent necessary for the accomplishment of 
federal objectives" cannot be too narrowly circumscribed by the state and 
"of course" and even "inevitably" encompasses reasonable advertising, 
advice, analysis of applicable federal laws (and of comparable alternative 
state laws), preparation of legal documents, and conduct of appeals, 
including written argument under the applicable laws. ^^ 

It is important to note that it was not Congressional enactment of 
the Patent Act that brought about the federal preemption decision in Sperry . 
Rather, it was the Patent Office's issuance of regulations and the 
establishment of a register under the general authority of that statute that 
constituted the preemptive action. ■'■^^ Similarly, Section 555(b) of the 
Administrative Procedure Act authorizing nonlawyer representation, the terms 
of which are not substantively dissimilar to the Patent Act provision at 
issue in Sperry , is not itself preemptive of state regulatory action but, 
rather, is dependent upon agency implementation. 

In addition to the Patent Office, a number of other federal agencies 
have clearly acted to preempt. The Internal Revenue Service, the National 
Labor Relations Board, and the Interstate Commerce Commission were among the 
early examples of agencies which issued regulations, established rosters. 



\ 



99 Id. at A02, 



100 Some commentators have focused on the Sperry Court's phrase 
"limited extent necessary for the accomplishment of the federal objective" 
and concluded that the activities necessary to carry out the federal 
agency's objectives may themselves be "limited" by the state unless the 
federal agency expressly authorizes a broad range of activity. See, e.g. , 
Rose, note 1 supra ; Simonelli, note ... supra . This focus and conclusion is 
probably too narrow and stringent, however, since the Court's opinion as a 
whole makes it clear that so long as the federal agency practice itself is 
generally authorized by the agency, there is a broad range of protected 
activity which is inevitably necessary and incidental to carry out that 
practice. Moreover, the Sperry Court plainly authorized that range of 
activity even though it recognized that the same activity, absent the 
federal authorization, could under state law constitute the "practice of 
law." Notwithstanding this broadened reading of Sperry , it may well be 
prudent for federal agencies to spell out in some detail the extent of 
authorized activities in view of the continuing vigor of state unauthorized 
practice laws and the continuing concern of laypersons about prosecution 
under them. See discussion in the text at notes 107 et. seq., infra. 

101 The Patent Act provision at issue in Sperry , 35 U.S.C. 31 merely 
empowered the Patent Office, if it so chose, to issue regulations governing 
the admission and conduct of lay representatives before it. See text at 
note 91, supra . 



94 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

and took other action to recognize lay practitioners. ^^^ In general, where 
the federal government has clearly provided for lay representation, state 
courts in recent years have increasingly allowed the representation under 
the federalism doctrine set forth in Sperry . In addition, where an agency 
has issued unambiguous regulations authorizing lay practice before it, the 
courts have taken a broadened view since Sperry of what activity is 
"incidental" to the federal agency representation. ^-^ Finally, as some 
federally endorsed lay activities - preparation of patent applications and 
tax returns, for example - have in recent decades become the livlihood of 
large numbers of laypersons (who have also developed political power), the 
courts and the state bars have relaxed their earlier hostility to the 



activities. 



lOA 



It must be stressed, however, that where a federal agency has not 
clearly acted to preempt (by issuing clear regulations, etc.) state courts 
may continue to prohibit lay assistance to persons involved in the agency's 
proceedings. This is illustrated by the recent case of State Bar of Texas 
v. Cortez , 67A S.W. 2d 803 (1985). 

Mr. and Mrs. Cortez advertised that they had thirty-five years of 
experience in immigration matters and offered to provide services to 
Hispanics seeking assistance before the Immigration and Naturalization 
Service. The record revealed that the most common activity of the Cortez 's 
was the selection and completion of the 1-130 Form (Petition to Classify 
Status of Alien Relative for Issuance of Immigrant Visa) by interviewing 
them and helping them fill out the form according to the instructions 
provided by INS.^^-* They also completed several other forms less frequently 
required such as applications for citizenship. The Cortez 's also assisted 
in gathering and storing supporting documentation and preparing the alien 
for his or her embassy interview. The Cortez 's charged a fee for their 
services, usually $A00. The Texas Supreme Court affirmed the decision of 
the trial court enjoining Mr. and Mrs. Cortez from continuing their business 
on the ground that their acts constituted the unauthorized practice of law 
since it required special legal skills to know which forms, if any, should 



102 An extensive list of federal agency regulations permitting lay 
practice and court decisions and articles concerning those regulations is 
set forth in Rose, note 1, supra . 

^^■^ See Rose, note 1, supra . 

^^^ See text at note 90, supra . 

105 This is the form most commonly filled out by laypersons employed 
by nonprofit agencies assisting aliens. AYUDA, for example, reported that 
approximately 80% of its immigration caseload involved preparation of this 
and similar forms. See text at note 33, supra . 



NONLAWYER ASSISTANCE 95 

be filed, and what information to impart to the INS that would enable the 
alien to obtain a visa but not be subject to deportation. ■'^^° 

A similar case arose in 1984 in North Carolina involving a client of 
Public Citizen, a public interest law firm. The client, Frances Lane, was a 
former nonlawyer employee of the Immigration and Naturalization Service who 
wished to provide for modest fees services similar to those provided in the 
Cortez case (and currently provided by laypersons employed by nonprofit 
agencies throughout the country). 

The State Bar's unauthorized practice committee threatened to 
prosecute her for unauthorized practice of law if she did so.^^' 
Subsequently, following Ms. Lane's retention of counsel, the state bar 
entered into a settlement agreement allowing her to conduct her immigration 
practice so long as her advertising deleted any reference to paralegal 
services or immigration law.-'-^° 

It would not seem that filling out routine adjustment of status and 
citizenship forms for the Immigration and Naturalization Service should be 
any more subject to state unauthorized practice prosecution in Texas than is 
the preparation of patent applications in Florida which was upheld by the 
Supreme Court in Sperry . 

Both Sperry and Cortez involved the following similar activities: 

1. Preparation of papers for submission to a federal agency on the 
basis of an understanding of a discrete body of federal rules and how those 
rules applied to the facts presented by their respective clients. 

2. Giving advice to their respective clients regarding the 
applicability of federal rules to their particular fact situations (the 
patentability of an invention in one case and the adjustment of status in 
another), both of which may involve advice as to which of several 
alternatives to follow. 



Similar holdings that preparation of immigration forms requires 
legal training and skills were handed down by the Florida Supreme Court in 
The Florida Bar v. Moreno-Santana . 322 So. 2d 13 (1975) and in The Florida 
Bar V. Retweta-Cabrera . 322 So. 2d 28, 29 (1975). 

^^' Comments of Alan Morrison, Executive Director of Public Citizen, 
at a meeting of the Committee on Regulation of the Administrative Conference 
of the United States, September 7, 1984, as reflected in the nonverbatim 
minutes of the meeting. 

1^^ Letter from Frances Lane to Public Citizen, July 9, 1984. 
Typically, investigations of unauthorized practice, and their resulting 
prosecutions or settlements, are unpublished. See note 113, infra. 



96 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

3. Conduct of their activities in their own offices in the states 
where they lived, rather than in the District of Columbia or in any federal 
facility. 

h. Imposition of fees for their services (the amounts of which were 
not characterized in either case as grossly excessive). 

5. Advertisement of their availability to provide the services in 
question. 

There was no question raised in either case of any special competence 
to perform the activities in question other than the charge by the state bar 
committees that they were not trained to be lawyers. (In the North Carolina 
case involving Francis Lane, it should be noted that Ms. Lane was formerly 
an employee in good standing of the Immigration and Naturalization Service.) 

The principal reason for the different treatment of the lay 
practitioner in Cortez from that accorded the patent agent in Sperry is that 
the Immigration and Naturalization Service has not implemented its authority 
under Section 555(b) of the Administrative Procedure Act to authorize 
nonlawyers to provide assistance in routine immigration matters for fees. 
Under INS regulations, nonlawyers may provide repeat representation only if 
they are employed by nonprofit organizations and providing free services to 
indigents or other persons eligible for their assistance. ^^" Fee paying 
cases are restricted to lawyers. (There is no limit on the fees that a 
lawyer may charge, and unlike fee awards in social security disability 
cases, the fees are not subject to agency approval). 

In accordance with the Attorney Practice Act, 5 U.S.C. 500, any 
lawyer may be admitted to practice before the Immigration and Naturalization 
Service without application of any special examination or other competence 
criteria. Conversely, the INS imposes strict competence criteria and 
admission requirements on nonlawyers who are employed by nonprofit agencies 
providing free assistance (primarily to indigents) . ^^^ 

The current director of AYUDA, a nonprofit organization accredited by 
INS and recipient of commendations from INS for its outstanding INS work, 
(see note ... , supra . ) reports that she received certification from the INS 
to provide lay representation in INS proceedings several years ago when she 
was employed as a member of AYUDA 's staff. She reports that she was 
required to show employment by AYUDA, submit letters of recommendation and 
other evidence as to her knowledge of INS rules, experience with INS 



^^^ ^ C.F.R. 292.1 A nonlawyer is also permitted under INS 
regulations to appear on a one-time basis, without fee, on behalf of a 
relative, friend or other person with whom there is a personal relationship, 

110 Id. 292.2 



NONLAWYER ASSISTANCE 97 

matters, and good character. She reports further that she was personally 
interviewed by an officer of the INS, that the agency itself was subject to 
a field investigation, and that, in addition, INS agents interviewed her 
neighbors and friends concerning her character. Notwithstanding this rather 
rigorous certification procedure, Ms. Vega reports that when she 
subsequently left the nonprofit agency for a period of time, she lost her 
certification because she was no longer employed by a nonprofit 
organization. Thus, she was not permitted to charge fees for her services 
in the open market. She then went to work for a lawyer specializing in 
immigration matters and performed work on his cases for which he charged 
clients the usual legal fees. Now that she has returned to AYUDA as its 
director she is once again eligible to be certified (although she has not 
yet applied for it).^-'--'- 

Similarly, Frances Lane, the North Carolina layperson desiring to 
provide assistance in routine immigration matters for a modest $100 fee was 
an employee in good standing of the Immigration and Naturalization Service 
before her retirement. Notwithstanding her acknowledged experience and 
competence, she is not authorized to charge fees for her services under 
current INS regulations, and, as a result, is faced with prosecution under 
the law of many states if she attempts to do so.-'-^^ The INS regulations 
contrast sharply with those of the Internal Revenue Service which 
automatically permits former nonlawyer IRS agents who have completed six 
years of IRS employment to provide representation before the Service at all 
levels . 

From the perspective of would-be nonlawyer practitioners, the Cortez 
and Lane cases are not isolated incidents in a climate otherwise favorable 
to their practice before federal mass justice agencies. Quite to the 
contrary, interviews reveal that they appear to nonlawyer s to be only the 



■'•^^ Interview with Yvonne Vega, Executive Director of Ayuda, in 
Washington, D.C. Ms. Vega noted that while her personal interview focused 
on her good character, other lay employees of nonprofit agencies have been 
examined as to their knowledge of INS rules. 

At the time Ms. Vega applied for certification, the certification 
procedure was handled from the outset by the various district offices of INS 
located throughout the country, although final approval was given by the 
Board of Immigration Appeals in Washington, D.C. In December, 1984, the BIA 
revised its procedures and provided that applicants for certification should 
apply directly to BIA. Certification is now largely granted on the basis of 
written documentation as to knowledge, experience and good character, 
although the district offices may still conduct an investigation as they 
deem appropriate. (District offices have 30 days in which to recommend 
approval of the application to the BIA.) 8 C.F.R. 292.2 (198A); Interviews 
with INS officials, Sanchez and Hurwitz, note 27, supra . 

112 See note 106, supra and accompanying text. 



98 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

latest examples of a confusion in application of state unauthorized practice 
laws to federal agency practice at best, and an ongoing antagonism to 
nonlawyer practice at worst. In any event, nonlawyer professionals who were 
interviewed, perceived a less than clear interface between state 
unauthorized practice laws and federal policy concerning practice before 
federal administrative agencies. ^^^ Significantly, they did not perceive 
any clear signal from federal mass justice agencies that nonlawyer 
representation for a fee is encouraged. Conversely, interviewees pointed to 
what they saw as signals that nonlawyer representation is encouraged by the 
federal government only if it is to be made available free of charge to the 
very poorest who cannot afford fees. 

Interviewees noted, for example, that federally funded legal aid 
organizations are generally barred from taking a fee generating case, unless 
they first attempt to find legal assistance from the private bar and no 
lawyer in private practice can be found who is willing to handle the 
matter. ^^^ Interviewees noted that federally subsidized legal aid 
organizations are not required to ascertain the availability of nonlawyer 
practitioners. 

Interviewees also noted that while listings of nonprofit 
organizations are sometimes maintained by mass justice agencies, these 
referral lists are often of use only to the very poorest claimants who are 
eligible for free services under the guidelines of the nonprofit 
organizations. 

Interviewees point to the fact that INS regulations allow lay 
representation only when no fees are charged. They surmised that opposition 
to lay representation before INS has contributed to the agency's failure to 
allow lay representation for fees. (It will be recalled that in December, 
198A, INS revised its rules relating to accreditation of nonprofit agencies 
and certification of laypersons working for those agencies. The INS summary 



^^^ It is difficult to obtain detailed information concerning the 
extent to which nonlawyer professionals are required or pressured, directly 
or indirectly, to cease activities which state bars consider unauthorized 
practice. A survey of state bar unauthorized practice enforcement 
committees revealed that 80% of the 1,669 complaints processed by them 
nationwide during 1980 resulted in informal, unpublished agreements, and 
that nearly all of the five percent of their cases which terminated in 
judicial findings of unauthorized practice were unreported. Only three 
judicial decisions concerning unauthorized practice were published in the 
nation during all of 1979 and only three others in 1980. See Rhode, Note 
81 , supra . 

^^^ Interviews with Willie Cook, Executive Director Neighborhood Legal 
Services Program, and with Leslie Long O'Leary, Pro Bono Coordinator, 
District of Columbia Bar. Legal service programs are allowed to handle 
social security claims of eligible clients, however. 



NONLAWYER ASSISTANCE 99 

to the final rules notes that it received a largely favorable public 
response to its proposed rules but "drew the most severe criticism" from 
those "who expressed the view that the growing complexity of 
immigration. .. law and procedure necessitated the elimination of nonattorneys 
in this area altogether. "^^^) 

Nonlawyer professionals providing assistance in social security 
disability cases as employees of nonprofit organizations noted that while 
the Social Security Administration regulations permit nonlawyer 
representation, they do not unambiguously stress that nonlawyer 
representatives may hold themselves out in the states as social security 
agents and charge fees in the marketplace for their services. Moreover, 
they note, while the enabling legislation for Social Security benefit claims 
provides that attorney fees may be deducted by SSA from a claimant's award 
and paid directly by the agency to attorneys, there is no similar proviso 
for nonlawyer representatives. ■'^■'•" This suggests to them that it was not 
contemplated that fee awards to nonlawyer practitioners would be routine or 
frequent . 

In fact, it is remarkable that even the existence of financial 
incentives (that is, fee awards in social security disability cases) has not 
resulted in a large pool of nonlawyer practitioners for those cases. Social 
Security Administration personnel estimated that the overwhelming majority 
of lay practitioners in the 12% of hearing request matters handled solely by 
them were paralegals working for legal aid and other nonprofit 
organizations. At the same time, the availability of fee awards in 
disability cases has significantly contributed to a dramatice increase in 
lawyer representation from 36.8% in 1977 to 6^-. 2% in 1983. ^^^ 

Thus, notwithstanding the fact that lay representation is permitted 
by the Social Security Administration, and lay practitioners may even 
receive awards, there has not developed any visible, readily identifiable 
cadre of social security disability "representatives" or "agents." No 
descriptive word even exists in popular parlance to describe such persons 
akin to the description of Patent Agents who practice before the Patent 
Office or Enrolled Agents who practice before the Internal Revenue Service. 
There are no readily identifiable organizations of such persons either. The 
National Organization of Social Security Claimants Representatives (NOSSCR) , 
the largest organization of persons providing representation in Social 



^•'•^ Also see text at note 59, supra . 

116 See 42 U.S.C. 406(a) (1983); 20 C.F.R. 404.975(b) (1976). (Agency 
may help an attorney collect a fee by deducting up to 25% of a claimant's 
past due award. ) 

11^ See Appendix A and Appendix B. The growth of legal service 
programs to assist indigents has also helped to increase both lawyer and 
nonlawyer representation. 



100 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

Security Administration proceedings, reports that approximately 400 of its 

2,A00 members are nonlawyers but that virtually all of them are paralegals 

employed by legal aid and other nonprofit organizations.^^** Although Social 

Security Administration personnel and staff of NOSSCR stated that they were 

aware of a handful of lay practitioners in the Social Security Field who 

were not employed by nonprofit organizations, they were not on any roster or 

referral list and thus their names and addresses could not be made available 

either to this author or to claimants seeking assistance. NOSSCR maintains 

a referral listing for persons needing assistance in Social Security 

matters, but it is unable to refer fee paying cases to anyone other than its 

' 1 1 Q 
lawyer members because it has no listing of lay practitioners.^^' 

Similarly, there are no visible and well known neighborhood offices 
for social security representatives akin to the H.R. Block and Sears Roebuck 
offices in the tax practice field. There are neighborhood legal aid and 
social service agency offices visible in most communities, but their 
services, as noted earlier, are ordinarily available only to indigents, and 
these agencies report that they cannot meet even all of their needs. ^•^^ A 
review of the fifty pages of lawyer advertising in the yellow pages of the 
District of Columbia telephone book revealed several thousand lawyers' names 
(under specialty headings such as "social security matters") but no listings 
of private lay practitioners for social security matters could be located. 
Names of lawyers can be obtained from bar association lawyer referral 
services, but there are no similar referral mechanisms for the working poor 
or moderate income groups who might desire to employ nonlawyers. 

Nonlawyer professionals who were interviewed also noted that while 
training programs in social security disability law and other subjects of 
federal agency practice are offered to nonlawyers by bar associations, law 
schools and nonprofit organizations, as well as by the federal government, 
none of these organizations will assign or refer a client to them 
directly. ^^^ Rather, cases are assigned to lawyers or to supervising 



^^° Interview with staff. National Organization of Social Security 
Claimants' Representatives. 



119 



Id. 



^20 See Note 13, supra . 

1^^ Several organizations offering training programs to laypersons in 
federal agency subjects such as social security and immigration law were 
surveyed for purposes of this report. They included: the District of 
Columbia Bar's public service office; the Legal Counsel for the Elderly 
Department of the American Association of Retired Persons; the Immigration 
and Naturalization Service's Voluntary Outreach Program; the George 
Washington University's Senior Paralegal Institute; Antioch Law School's 
Paralegal Institute; and the federally funded Neighborhood Legal Services 
Program. 



NONLAWYER ASSISTANCE 101 

lawyers in nonprofit organizations. Organizations offering the training 
confirmed this practice and stated a principal reason for it was the need to 
protect the program against bar charges of unauthorized practice. For 
example, the District of Columbia Bar's public service office confirmed that 
even though federal law permits lay representation in social security 
matters, cases coming through the Bar's referral service are always referred 
to lawyers and never to nonlawyers. (They may, however, be referred to 
recent graduates of law schools whose only training in the subject area has 
been the same training program offered the nonlawyers. ■'^^•^) 

Even nonprofit agencies surveyed which employ legal personnel as well 
as nonlawyers reported that all cases are assigned internally to supervising 
lawyers rather than to nonlawyer professionals on the staff. These 
organizations were visibly proud of their nonlawyer staff. Nearly all 
nonlawyer staff were reported to be college graduates and many had graduate 
degrees as well. They were reported to have come from a variety of skilled 
backgrounds and experiences (some of them having come to the nonprofit 
agencies upon retirement from their careers). Some were said to have had 
backgrounds and experience in social security or immigration law before 
coming to the nonprofit agencies. Notwithstanding these qualifications, 
staff directors uniformly stated that it was the policy of their 
organizations never to assign cases to nonlawyer professionals on the staff. 
Rather, cases were always assigned to supervising lawyers. Although a 
variety of organizational reasons were cited by the differing groups, 
including the desire of the lawyer directors in several of the organizations 
to ensure "quality control," a principal reason cited by every single 
organization was the need to protect its program against charges of 
unauthorized practice. ^^-^ 



^^^ Interviews with Leslie Long O'Leary and Ann Barker of the District 
of Columbia Bar's Public Service Office. 

^^•^ The practice of the American Association for Retired Persons' 
Legal Counsel for the Elderly Department is instructive. That agency has 
received one of three grants from the Social Security Administration to 
conduct training programs in social security law for nonlawyer employees of 
nonprofit organizations throughout the country. The agency has developed 
extensive training manuals. One of the training manuals in the District of 
Columbia reviews the District's unauthorized practice laws. It notes that 
many federal agencies have granted laypersons the right to appear before 
federal administrative agencies in a representative capacity. The manual 
concludes, however, with a set off and boldface warning that 
"notwithstanding a paralegal's authority to represent a client.... it is LCE 
policy that all paralegals must have their work supervised by a staff 
attorney. .. [in order to] ensure quality legal work and prevent any possible 
unauthorized practice of law." Training Materials: What Constitutes the 
Unauthorized Practice of Law in the District of Colximbia? Legal Counsel for 
the Elderly Continuing Legal Education Seminar. 



102 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

The directors of the nonprofit organizations reported that they 
devote an extensive portion of their training sessions and training 
materials to the subject of state unauthorized practice rules and the need 
of nonlawyers to comply with them. (They also pointed out the extreme 
difficulty of teaching nonlawyers how to draw the line between authorized 
and unauthorized practice when lawyers, courts, and drafters of model codes 
have been unable to do so. See discussion in text at notes 83-87 supra . ) 

Perhaps as a result of the emphasis on unauthorized practice in staff 
training, perhaps as a result of the long history of unauthorized practice 
battles in the states, or a combination of the two, interviews with 
nonlawyer professionals working for social service agencies in the fields of 
social security and immigration laws disclosed that not a single one of them 
would consider opening a private social security or immigration practice. 
The predominant reason given was fear of state bar unauthorized practice 
charges. ^^^ 

In sum, even when mass justice agency rules allow nonlawyer practice, 
and even when it would appear that the authorized practice is probably 
protected against state unauthorized practice laws under the federal 
preemption doctrine, nonlawyer professionals are extremely skittish about 
getting into the "business" of agency representation (with the exception of 
the business of tax preparation where the practice has been well-established 
for decades and accepted by state bars). This seems to be due to the 
cumulative effect of past and ongoing organized bar opposition to nonlawyer 
practice before federal administrative agencies; the continuing ban on 
nonlawyer representation in many state administrative agencies; the 
conflicting decisions from state to state over what constitutes the 
unauthorized practice of law, including the conflicting and confusing state 
court decisions on whether practice before administration agencies 
constitutes unauthorized practice; the continuing state prosecution of some 
federal agency practice (illustrated by the Cortez case); the continuing 
prohibition in lawyer codes of ethics against assistance to laypersons 
engaged in unauthorized practice; the half -heartedness with which nonlawyers 
practice is encouraged by some federal agencies (exclusion of nonlawyer 
practice for fees, for example); and the continuing general antipathy of 
many state bars to nonlawyer legal practice generally. All of these past 
and ongoing factors have created an atmosphere of uncertainty, confusion and 
fear on the part of nonlawyer professionals who might otherwise be a source 
of assistance for the many persons now unrepresented in federal mass justice 
agency proceedings. 

The results of this empirical study suggest thai, wnile the issuance 
of unam'biguous regulations as contemplated by Section 555(b) of the 
Administrative Procedure Act is essential to establishing federal 
preemption, agency regulations alone may not be sufficient to allay the 



^^^ Twenty-five nonlawyer professionals working for the social 
services agencies listed in note 2, supra were interviewed. 



NONLAWYER ASSISTANCE 103 

pervasive fears of the would-be lay practitioners. Agencies that wish to 
encourage increased nonlawyer assistance may have to do more than merely 
issue regulations; they may have to take such measures as certifying 
nonlawyer practitioners, creating rosters and referral lists, and announcing 
very clearly the incidental activity to be encompassed in the authorized 
nonlawyer professional practice. 

In addition, although it is likely that agencies have implied 
authority to admit nonlawyers to practice before them, and although it is 
probable that even if they do not have implied authority. Section 555(b) of 
the APA authorizes agencies to admit nonlawyers, it may be prudent and 
useful to amend the language of Section 555(b) itself to make it crystal 
clear that such agency action is authorized. Further, it may be helpful to 
amend Section 555(b) to make it unambiguously clear that those admitted to 
practice before federal agencies are authorized to do all that is incidental 
and necessary to that representation in their respective states, including 
advertisement of their availability, giving advice as to applicable federal 
rules, preparing relevant documents, and charging fees, keeping in mind that 
in its unanimous Sperry decision, the Supreme Court opined that these 
activities are an "inevitable" part of federal agency practice. ■'•^^ 



^^^ See text at note 95 supra . 



104 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

VT . Federal Mass Justice Agency Authorization for Increased 
Nonlawyer Professional Assistance Can Be Accomplished in 
a Manner that is Consistent with Agency Needs to 
Regulate Competence and Ethical Conduct of Practitioners 

Federal agency rules and practice which, directly or indirectly, 
limit the supply of nonlawyer representatives are largely grounded in 
protective notions - that is, that some or all of the persons affected by 
the agency's proceedings will be subject to exploitation and harm by 
incompetent or unscrupulous persons acting as their representatives. ^ 
This survey found that there was uniform agreement, both within and without 
government, that there are indeed unscrupulous persons who take advantage of 
some mass justice agency participants, particularly the non-English 
speaking, the physically and mentally disabled, the uneducated, and other 
vulnerable persons. Interviewees had legions of "horror stories" about so- 
called "immigration experts" or "social security experts" who were 
completely without knowledge of INS or Social Security rules and who 
succeeded in obtaining wedding rings, lifetime savings, and other existing 
assets from vulnerable persons on the promise that they would get a "green 
card" or disability payments for life. One interviewee related a story 
about one so-called "social security expert" who would round up a whole van 
of elderly social security recipients on the day that their social security 

checks arrived in the mail and take them to his own bank for deposit of the 

1 9S 
checks into his own account. •^^-' 

However, the "horror stories" were not by any means limited to 
nonlawyers. Complaints against unscrupulous lawyers were also frequently 
cited as a major problem, particularly complaints of fee gouging. A recent 
Time magazine article highlighted the problem of exploitation of immigrants 
by both lawyers and nonlawyers. It noted that five lawyers had been 
convicted or sentenced in the past year on charges stemming from immigration 
violations and reported that "INS officials are among the critics [of 
lawyers]: they estimate that 30% of permanent resident petitions are 
fraudulent with corrupt or incompetent lawyers often to blame. "^'^^ 
Conversely, INS officials interviewed could recall only two instances in the 
past two years in which nonlawyers who had been accredited by the agency had 
been the subjects of investigation for unethical conduct or incompetent 
representation.^ (The agency does not maintain statistical data on 



^^^ Similarly, protective notions are usually relied on by state 
courts in upholding state unauthorized practice laws. For a critical 
analysis of these decisions, and the reasoning threin, see the artciles 
cited in note 79, supra . 

'■^^ Interview with N. Schorr, note 116 supra . 

^26 Time, July 8, 1985, p. 77. 

^^' INS interviews, note 25, supra . 



NONLAWYER ASSISTANCE 105 

numbers of complaints or numbers of persons disbarred from agency practice 
or otherwise disciplined.) Moreover, it is not apparent to this author that 
the existing ban on representation in INS proceedings by a former staff 
member (now director) of a nonprofit agency recognized by INS as having an 
"outstanding reputation for assisting clients within the law" or by a former 
INS employee who was in good standing in any way protects the public. 1^° 

In sum, it would appear that while mass justice agencies are no doubt 
justified in enacting regulations to control the conduct of practitioners in 
order to prevent abuse of the public, there is no evidence that those 
regulations need to be significantly different with respect to nonlawyers 
than they are with respect to lawyers . 

In this connection, it is noteworthy that the problem of protecting 
the public from unscrupulous lay practitioners is not a new one for federal 
agencies. Further, past history demonstrates that the remedy for the 
problem need not be disqualification of all nonlawyers. For example, the 
problem of unscrupulous nonlawyer patent agents at one time became a 
national scandal and led to several Patent Office reforms. As the Supreme 
Court noted in its Sperry decision: 

Despite the early recognition of nonlawyers by the Patent 
Office, these agents, not subject to the professional restraints 
of their lawyer brethren, were particularly responsible for the 
deceptive advertising and victimization of inventors which long 
plagued the Patent Of f ice. ■'•'^^ 

What is instructive about the Patent Office experience is that even though 
the great bulk of complaints of misconduct involved nonlawyer patent agents, 
the Patent Office did not disqualify all lawyers as a group. Rather, it 
tailored reform in the form of good moral conduct requirements and patent 
examinations which could be complied with by both lawyers and nonlawyers. 
The Patent Office system has been widely lauded as a highly workable one, 
and one which has successfully rooted out incompetent and unscrupulous 
patent agents without broadly disqualifying a whole class of persons (that 
is, the class of nonlawyers). As the Sperry court noted: 

So successful have the efforts of the Patent Office been that 
the Office was able to inform the Hoover Commission that there is 
no significant difference between lawyers and nonlawyers either 
with respect to their ability to handle the work or with respect 
to their ethical conduct .' ■'■-'^ 



^^° See discussion at ntoes 105, 109, supra . 

^^^ Sperry v. Florida ex rel Florida Bar , supra , at 390. 

130 Id. at A02. 



106 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

Moreover, the Patent Office has succeeded notwithstanding the fact that a 
patent application is, in the words of two Supreme Court decisions, "one of 
the most difficult legal instruments to draw with accuracy" and "frequently 
requires written argument .. .under the applicable rules of law."^-^^ 

Similarly, other studies have disclosed that federal agencies which 
admit nonlawyers to practice have generally not found unethical conduct of 
nonlawyers to be a greater problem than that posed by unethical lawyers and 
have not found the problem of regulating nonlawyer conduct to be greater 
either. This was the conclusion of the American Bar Association Committee's 
survey of thirty-seven federal agencies, and it was the conclusion reached 
by Professor Rose on the basis of his interviews with federal agencies in 
the economic regulatory area.^-^'^ 

There are, of course, fundamental ethical requirements that agencies 
should impose on both lawyers and nonlawyers. Agencies are likely to have 
these already in place, at least for lawyers. Provisions barring conflicts 
of interest or criminal activity, for example, are near universal. Other 
provisions barring gross negligence, or fee gouging, may or may not be 
promulgated specifically by various agencies, but it would seem that where 
adopted, they should apply with equal force to lawyers and nonlawyers. 
These activities, and similar unethical conduct, are barred in the American 
Bar Association's model codes of lawyer conduct which have been adopted by 
nearly all federal agencies for the purpose of regulating the ethical 
conduct of lawyers practicing before them. 

The issue of nonlawyer competence can be treated simply as an ethical 
matter (as it currently is in the ABA's model code provisions such as those 
barring negligence and assumption of tasks beyond one's capabilities without 
association of one who is more skilled). Or federal agencies can - and some 
of them do - employ a wide range of additional methods to ensure that 
nonlawyer practitioners meet agency standards of competence. The Patent 
Office's administration of an examination to potential patent agents was 
discussed above. A similar examination system is employed by the Internal 
Revenue Service although it is used only for certain categories of 



131 



Id. 



'■^^ See note 23, supra , and Rose, note 1, supra , at 58-69. For 
example. Professor Rose's interviews with Interstate Commerce Commission 
officials revealed that there had been no major disciplinary problems with 
nonlawyer practitioners in fifteen years. Only in the Internal Revenue 
Service were the total numbers of disciplined nonlawyers reported to be 
significantly large. The Office of Practice reported that it had imposed 
discipline against nonlawyers in approximately two-thirds of the 360 
discipline cases arising in the five-year period between 1978 and 1983. 
Hwever, these numbers were not viewed by IRS officials with alarm in light 
of the extremely large numbers of nonlawyers authoriaed to practice before 
the IRS (see note 27, supra ) . 



NONLAWYER ASSISTANCE 107 

representatives. As noted earlier, the IRS system accomodates 
representation to a limited extent from minimally trained H. & R. Block type 
personnel who are not subject to examination as well as representation in 
all matters from former IRS agents, certified public accountants and lawyers 
who also are not subject to examination. (Lawyers and certified public 
accountants are presumed by virtue of their training to be qualified and are 
authorized under the Attorney Practice Act, 5 U.S.C. 500 to provide 
representation.) Finally, the IRS permits representation of the general 
public in all matters by nonlawyer "enrolled agents" who must pass stiff 
examinations and meet continuing legal education requirements. ■'^■^•^ Ethical 
restrictions against conflicts of interest, fraud, misrepresentation, and 
other malfeasance are enforced against both lawyers and nonlawyers through 
the Service's disciplinary machinery. The agency retains the ultimate 
authority to disbar or otherwise discipline both lawyers and nonlawyers. -'■■^^ 

As is the case with the Internal Revenue Service, the Immigration and 
Naturalization service employs a multi-tiered approach to assuring 
competence among those representatives who do not charge fees.-'^-'-* (As noted 
earlier in this study, nonlawyers, no matter how competent or experienced, 
are not authorized under agency rules to provide representation if they 
charge fees.) Nonlawyer friends, clergy, and neighbors appearing on a one 
time basis without fee are not subject to any special competence or 
experience requirements. Nonprofit organizations assisting the general 
public, however, must be recognized by the Board of Immigration Appeals, and 
individual employees therof must be accredited before they are permitted to 
appear in representational capacities.^-'" Partial accreditation of 
nonprofit organization employees who do not yet satisfy all the INS training 
and experience criteria enables those employees to assist individuals in 
filling out forms, but it does not allow them to appear as representatives 
in INS proceedings. To be fully accredited, an individual employee of a 
nonprofit organization must satisfy experience criteria as well as good 
moral conduct standards. ■'^■^' 

Other agencies, such as the Social Security Administration, have 
historically not found it necessary to require nonlawyer representatives to 
pass examinations, complete continuing legal education courses, or satisfy 



l-^-^ See note A9, supra . 

^^^ See ;iote 132, supra . 

^^^ See notes 107 and 108, supra . 

^■^" The Veterans Administration also requires that nonprofit 
organizations desiring to provide representatoin to the general upblic in 
V.A. proceedings be recognized by the agency. 



137 



See disucssion in text at note 109. 



108 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

past experience or other competence criteria. ^•^° SSA officials reported, 
however, that the agency is considering the adoption of stricter measures 
than now exist to protect the public, including a procedure by which agency 
claimants can complain to the agency about their representatives. Agency 
officials pointed out that there is a degree of control over competence of 
practitioners by virtue of the fact that attorney and agent fees must, by 
statute, be approved by the agency in social security disability proceedings 
and in some other benefits cases. (Data concerning fee awards to nonlawyers 
has not been collated by the agency.) 

As the foregoing discussion indicates, federal agencies currently 
employ a variety of mechanisms to ensure competent representation by 
practitioners, and they are not necessarily the same in every agency. This 
study has concluded that there is no reason that competence criteria should 
be uniform throughout government since each agency has its own particular 
evils to prevent, differing skill needs to carry out the varied mandates of 
the agencies, as well as differing cost benefit and other administrative 
issues to consider. (It will be recalled that in enacting the 
Administrative Procedure Act, Congress considered and clearly determined to 
authorize federal agencies to continue their then existing practice of 
imposing varied practice criteria according to the particular needs of the 
respective agencies. This determination was reaffirmed in 1965 at the time 
of enactment of the Attorney Practice Act.)^-^^ 

Finally, this study ascertained that enforcement of both competence 
standards and ethical conduct standards varies from agency to agency in the 
mass justice area as it does in other areas. The Office of Practice in the 
Internal Revenue Service, for example, has an active progrsim of 
enforcement.^^ On the other hand, while the Social Security Administration 
maintains ethical standards and retains the authority to discipline and 
disbar lawyers and nonlawyers, in practice the authority is rarely used.^^^ 
There have been numerous studies and articles on the subject of inconsistent 
federal disciplinary rules and the inconsistent - and sometimes lax - 
enforcement thereof. As one federal court wrote over thirty years ago, 
"probably no subject has received more continuing effort, so far without 
success, to accomplish by legislative enactment some uniformity and 
desirable standards of admission and disciplinary action than has this 



^^° Some regulatory agencies - for example the National Labor 
Relations Board - have also historically adopted a laissaz faire approach to 
pracititioner regurlation. See Rose, note 1, supra , and ABA Committee 
Survey, note 23, supra . 

1-^^ See discussion in text at notes 60 and 61, supra . 



140 



Ul 



See note 132. 



See text and note 138, 



NONLAWYER ASSISTANCE 109 

problem of practice before administrative agencies. "■'^^•^ Although the issue 
of automatic admission of lawyers to practice before federal agencies has 
been resolved in the intervening years with the passage of the Attorney 
Practice Act, the issue of inconsistent enforcement of discipline remains. 
Notwithstanding repeated efforts by bar groups to remove lawyer discipline 
from agencies to state bar disciplinary entities. Congress has continued to 
allow federal agencies to exercise discretion in the matter of practitioner 
discipline for both lawyers and nonlawyers. The Administrative Conference 
of the United States considered the issue in 1982 and concluded that any 
problems concerning inconsistent attorney discipline before federal agencies 
were not of such a magnitude as to require changing the statutory 
authorization or adoption of uniform federal standards. ■'•^-^ 

It is not the purpose of this paper to revisit the long-lived 
controversy over federal agency enforcement of practice rules. Nor is it 
necessary to resolve the pros and cons of inconsistent discipline by federal 
agencies in order to address the discrete issue of whether mass justice 
agencies should be urged to admit more nonlawyers to practice in order to 
alleviate the problem of insufficient numbers of representatives for the 
overwhelming numbers of ordinary citizens having claims or disputes before 
those agencies. In view of the finding that disciplinary problems caused by 
nonlawyers in federal agency proceedings generally are not believed by 
agency officials to be significantly greater than those caused by lawyers, 
and in view of the finding that enforcement of good conduct rules against 
nonlawyers is a manageable task even when large numbers of nonlawyers are 
admitted to practice (as is the case in the Internal Revenue Service), this 
paper concludes that the potential need to discipline errant nonlawyers 
should not necessarily deter mass justice agencies from encouraging 
increased nonlawyer representation. This is not to say, however, that 
agencies should have no rules governing the ethical conduct of nonlawyers. 
To the contrary, in order to protect the public, agencies should make 
applicable to nonlawyers the existing rules dealing with lawyer malfeasance 
such as negligence, fee gouging, fraud, misrepresentation and representation 
when there is a conflict of interest. Moreover, agencies should ensure that 
effective procedures are established for adequate enforcement of those rules 
of practice, including procedures whereby the adversely affected public can 
complain about misconduct of those nonlawyers admitted to practice before 
the agencies. 



1^^ Camp V. Herzog, 104 F.Supp. 13A (D.D.C. 1952). A more recent 
discussion of the problem appears in Best, Shortcomings of Administrative 
Agency Lawyer Discipline , 31 Emory L.J. 535 (1982). 

^^^ See note 60, supra . 



1 10 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

Conclusion 

This study has determined that a large number of individuals in mass 
justice agency proceedings are unrepresented and that a source of assistance 
that has not been fully tapped exists in the pool of skilled nonlawyer 
professionals. It appears that guidance to mass justice agencies on the 
subject of nonlawyer practice would be useful, and that it should encompass 
encouragement to the agencies to review their regulations and policies with the 
twin goals of increasing representation and maximizing the goal of free choice 
of representative whenever feasible. 

This study has further ascertained that in some federal mass justice 
agencies, nonlawyer representation has not been particularly encouraged by 
agency rules and policies, and in some instances it has been discouraged. This 
has served to deter nonlawyer professionals from seeking to establish federal 
agency practices because they believe they will be subject to prosecution under 
state laws prohibiting the unauthorized practice of law. This study has 
concluded that because the state unauthorized practice of law problem is so 
pervasive, and because federal agency regulations must unambiguously preempt 
state laws to provide protection to nonlawyer practitioners, mass justice 
agencies should be urged to declare uncunbiguously their intention to preempt, 
both with respect to representation during agency proceedings and with respect 
to all activity incidental to that representation which may be performed in the 
states. In so doing, the agencies should, of course, consult and coordinate 
with states and other interested parties before adopting final regulations in 
accordance with the recommendations on preemption promulgated by the 
Administrative Conference in Recommendation 8A-5 on December 6, 1984. 

Mass justice agencies should further be encouraged to tailor their 
admission criteria narrowly so that particular issues of competence in agency 
proceedings are addressed without overly broad disqualification of the entire 
class of nonlawyers (or of nonlawyers who charge fees.) Given the evidence 
that skills vary more from individual to individual than from class of lawyers 
to class of nonlawyers, those agencies that desire to impose competence 
requirements should be encouraged to focus on the particular functions to be 
performed at varying levels of agency proceeding, and the particular skills, 
training and experience needed to perform competently those particular 
functions. (The Internal Revenue Service is a good model in this regard, as is 
the partial and full accreditation scheme of the Immigration and Naturalization 
Service for employees of nonprofit organizations.) In this connection, 
agencies should determine carefully and narrowly whether there are proceedings 
of a trial type nature that are so highly specialized that it is essential to 
mandate representation only by those who are trained trial lawyers and familiar 
with rules-^of evidence and hearings on a record leading to judicial review. 



NONLAWYER ASSISTANCE 1 1 1 

Finally, mass justice agencies should review their rules of practice that 
deal with attorney misconduct (such as negligence, fee gouging, fraud, 
misrepresentation and representation when there is a conflict of interest) to 
ensure that similar rules are made applicable to nonlawyers as appropriate and 
should ensure that effective agency procedures are established for adequate 
enforcement of those rules of practice, including procedures for receiving 
complaints from the adversely affected public. 



112 



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BACKGROUND REPORT FOR RECOMMENDATION 86-2 



USE OF THE FEDERAL RULES OF EVIDENCE IN FEDERAL AGENCY 

ADJUDICATIONS 



Richard J. Pierce, Jr. 



Report to the Administrative Conference of the United States 



(Published in Administrative Law Review, volume 39, number 1, Winter 1987) 



134 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

On June 20, 1986, the Administrative Conference adopted 
Recommendation 86-2, Use of the Federal Rules of Evidence in 
Federal Agency Adjudications. The vigorous debate that preceded 
adoption of the recommendation focused on three primary goals. ^ 
First, the Conference expects the recommendation to produce 
greater uniformity among agencies and among presiding officers in 
their approach to evidentiary decision-making. Second, the 
Conference hopes to discourage Congress from enacting in new 
statutes or retaining in existing statutes^ provisions that 
purport to mandate use of the Federal Rules of Evidence ("FRE") 
in agency adjudications. Most of the exclusionary provisions of 
the FRE, such as the hearsay rule and its many exceptions, 3 were 
promulgated to control fact-finding by lay jurors;^ technical 
application of these rules directly in agency adjudications is 
unnecessary, inappropriate and counterproductive. Third, the 
Conference hopes to encourage agencies to assist presiding 
officers in their evidentiary decision-making by conferring clear 
discretion to exclude evidence the presiding officer considers 
unreliable, particularly when admission of such unreliable 
evidence is likely to require an inordinate amount of valuable 
hearing time. 

The purpose of this study is to suggest the extent to which 
federal agencies should rely upon the FRE in conducting 
adjudicatory proceedings. At present, 1121 federal 
Administrative Law Judges ("ALJs") apply 280 different sets of 
evidentiary rules in the process of presiding over far more 
adjudicatory proceedings each year than are resolved in the 
federal courts. The evidentiary procedures now used in agency 
adjudications vary substantially along a spectrum from no 
reference to evidentiary rules at all,^ to hortatory reference to 
the FRE as a source of guidance, ^ to mandatory incorporation of 
the FRE. 8 



FEDERAL RULES OF EVIDENCE 135 

During the period from 1940 through 1911, scholars and 
appellate judges engaged in a lively debate concerning the 
appropriate role of formal evidentiary rules in agency 
adjudications. Professor Davis devoted much of his scholarship 
during this period to developing and supporting his thesis that 
formal rules of evidence have no place in agency proceedings 
because of the many differences between agencies and courts. ^ 
Dean Gellhorn later joined him in this effort by writing what 
remains today the most complete statement of the case against the 
application of evidentiary rules designed to govern jury trials 
in agency adjudicatory proceedings . ^^ Federal appellate courts 
declined to accept this thesis until the Supreme Court's 1971 
opinion in Richardson v. Perales , ^^ overruling the "legal 
residuum rule," seemingly invited agencies to admit evidence that 
would be inadmissible in a court by holding that an agency could 
predicate a finding of fact entirely on such evidence in some 
circumstances . 

Since 1971 scholars have devoted little attention to the 
broad question of the evidentiary rules appropriate for use by 
federal agencies. The relatively little scholarly writing in 
this important area has been narrowly focused — either on the 
reaction of the courts of a particular state to the Supreme 
Court's holding in Richardson v. Perales ^^ or on the unique 
issues that arise when an agency is urged to apply a 
constitutionally based exclusionary rule in an adjudicatory 
proceeding. 13 

It is important to revisit this significant issue at this 
time. Agencies are being asked to play an increasingly important 
role in the legal system, both as policy-makers and as 



136 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

administrators of "mass justice. "^^ Their evidentiary regimes 
differ significantly — sometimes as a result of congressional 
decisions and sometimes as a result of voluntary adoption of 
rules more stringent than Congress required. Since 1971, 
Congress and the Court have adopted for the first time a complete 
set of evidentiary rules applicable to federal courts. ^^ ALJs 
apply agency evidentiary rules in an uneven manner, ^^ and 
reviewing courts experience difficulty in their attempts to 
review evidentiary rulings made under some of the rules of 
evidence adopted by agencies or imposed on them by Congress. ^^ 

The study consists of three parts. Part I is a description 
of the present state of the law, including the statutory 
framework in which agencies select evidentiary rules, the 
evidentiary regulations agencies have adopted, and judicial 
decisions interpreting and applying those statutes and 
regulations. Part II reports the results of a survey of ALJs 
with respect to the extent of their reliance on the FRE and their 
opinions concerning the relationship between the evidentiary 
rules they apply and several criteria of the fairness, efficacy, 
and efficiency of the adjudicatory proceedings over which they 
preside. Part III of the study includes analysis of the issues 
presented and recommendations concerning the appropriate role for 
the FRE in agency proceedings. 

I. THE PRESENT STATE OF THE LAW 

Statutes 

There are two potential sources of statutory constraints on 
an agency's choice of evidentiary rules — the Administrative 
Procedure Act (APA) and agency organic acts. The only provision 
of the APA that relates to evidentiary issues is §556 (d): 

Except as otherwise provided by statute, the proponent 
of a rule or order has the burden of proof. Any oral 
or documentary evidence may be received, but the agency 
as a matter of policy shall provide for the exclusion 
of irrelevant, immaterial or unduly repetitious 
evidence. A sanction may not be imposed or rule or 
order issued except on consideration of the whole 
record or those parts thereof cited by a party and 
supported by and in accordance with the reliable, 
probative, and substantial evidence. 18 

The language and legislative history of this provision leaves no 
doubt that, while Congress intended to limit agencies' power to 
base findings of fact on evidence of low quality, it also 
intended to permit agencies' discretion to decline to apply the 
rules of evidence that govern judicial trials. 1^ 

Many agency organic acts do not address evidentiary issues 



FEDERAL RULES OF EVIDENCE 137 

at all, except by incorporating the APA by reference. Of those 
that do address evidentiary issues, most either recite the APA 
standard verbatim or paraphrase that standard. 20 jn a few 
statutes, however. Congress purported to limit the agency's 
discretion to admit evidence that would not be admissible in 
court. The statutory provision applicable to National Labor 
Relations Board (NLRB) adjudications illustrates the nature of 
the constraint most frequently imposed: 

Any such proceeding shall, so far as practicable, be 
conducted in accordance with the rules of evidence 
applicable in the District Courts of the United States 
under the Rules of Civil Procedure for the District 
Courts of the United States, adopted by the Supreme 
Court of the United States pursuant to section 2072 of 
Title 28.21 

Agency Regulations 

There are 280 regulations that govern evidentiary decision- 
making by federal agencies. Most agencies have a single 
evidentiary regulation applicable to all adjudications, but some 
distinguish among proceedings of different types or conducted 
under different statutes. 22 Agency evidentiary regulations 
differ considerably in their precise language, but they can be 
divided initially into two general categories. The majority — 243 
of 280 — make no reference to the FRE and appear not to impose any 
constraints on the discretion of Administrative Law Judges to 
admit evidence. Often these provisions either parrot the APA or 
paraphrase it. The other 37 evidentiary regulations make some 
reference to the FRE. 

Of the agency evidentiary regulations that include a 
reference to the FRE, most require use of the FRE "so far as 
practicable." In the case of NLRB, 23 congress required the 
agency to adopt such an evidentiary regulation. In other cases, 
such as the Occupational Safety and Health Review Commission 

(OSHRC) ,24 the Department of Interior (DOI),25 interstate 
Commerce Commission (ICC), 26 and Federal Communications 
Commission (FCC), 27 the agency apparently adopted the "so far as 
practicable" ■ standard voluntarily. In a few cases, an agency's 
evidentiary regulation refers to the FRE, but only as a source of 
potentially useful guidance to ALJs. The Department of Labor's 

(DOL) evidentiary regulation illustrates this approach. 28 dOL's 
unusually long regulation begins with a general provision that 
describes the role of the FRE in DOL adjudications: 

(a) Applicability of Federal Rules of Evidence. Unless 
otherwise provided by statute or these rules, and where 
appropriate, the Federal Rules of Evidence may be 
applied to all proceedings held pursuant to these 
rules . 



138 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

The contrast between the permissive reference to the FRE in the 
DOL regulation and the mandatory reference in the "so far as 
practicable" standard is evident. The DOL regulation goes on to 
paraphrase several Federal Rules, including Rule 103 (objections 
and offers of proof) , Rule 402 (relevant evidence generally 
admissible) , Rule 403 (exclusion of relevant evidence on grounds 
of prejudice, confusion, waste of time, or undue delay), and Rule 
1006 (summaries admissible) . The DOL regulation also expressly 
authorizes ALJs to limit the number of witnesses who testify on 
an issue and to limit the amount of cross-examination of 
witnesses in order to avoid prolonging the hearing or burdening 
the record — a power implicitly accorded federal judges by FRE 
403.29 

Judicial Interpretation of Statutes and Regulations 

If an agency's statutory and regulatory provisions relating 
to admissibility of evidence incorporate only the APA standard, 
it seems impossible for an agency action to be reversed on the 
basis that the agency erroneously admitted evidence. Courts 
routinely decline to reverse agencies on this basis. ^0 The 
converse does not follow, however. An agency action can be 
reversed solely because it refused to admit evidence that is 
admissible under the FRE. 31 This combination of holdings is 
based on the sensible reasoning that, while the special 
characteristics of agency proceedings justify admission of some 
evidence that is not deemed sufficiently reliable to be 
considered by lay jurors, there is no justification for agencies 
to refuse to consider at all evidence that is deemed sufficiently 
reliable to be considered even by lay jurors. ^2 

Agencies that are bound by statute or regulation to adhere 
to the FRE "so far as practicable" standard may be subject to 
some judicially imposed constraints on their discretion to admit 
evidence that would not be admissible under the FRE. Courts have 
not interpreted and applied this standard in a consistent manner. 
Indeed, courts called upon to apply this standard seem troubled 
and confused in their responses. Their confusion is 
understandable. What does Congress or an agency mean when it 
mandates compliance with a detailed set of rules "so far as 
practicable"? Who is to determine when compliance is 
practicable — the ALJ, the agency, or a court? By what standards 
is such a determination to be made? What sanction should a court 
impose if an agency does not follow the FRE when a court believes 
that it was "practicable" for the agency to follow the FRE? The 
results of^ the cases decided under the "so far as practicable" 
standard suggest implicitly that courts are resolving these 
issues in very different ways, but none of the decisions to date 
contain sufficient analysis of the issues to determine the basis 
for the court's decision. Courts simply differ in result using 
broad conclusory language and declining to acknowledge the 



FEDERAL RULES OF EVIDENCE 139 

existence of contrary decisions of other courts. 

Three circuit court decisions illustrate the disparate 
approaches taken in this area. In National Labor Relations Board 
V. Process and Pollution Control Co. ,^^ the Tenth Circuit 
reversed the agency action in part because the agency admitted 
hearsay evidence inadmissible under the FRE when the court 
believed it was practicable for the agency to follow the FRE. In 
Helena Laboratories Corp . v. National Labor Relations Board , ^ 4 
the Fifth Circuit dismissed a similar argument summarily, noting 
only that the agency was required to follow the FRE only "so far 
as practicable." The Eighth Circuit completed the circle in 
National Labor Relations Board v. Addison Shoe Corp. ^^ The court 
reversed the agency in part because it did not admit evidence 
made inadmissible by the FRE. The court admonished the agency 
for adhering to the FRE too strictly. Thus, some courts 
apparently interpret the "so far as practicable" standard to 
accord near total discretion to agencies. Other courts interpret 
it as a mandate to comply with the FRE except in unusual 
circumstances. Still others apparently view the standard as a 
mandate to admit evidence made inadmissible by the FRE except 
when unusual circumstances require application of the FRE. 

Most disputes concerning agency decisions to admit or 
exclude evidence that reach the appellate court level involve 
admission or exclusion of hearsay; a few involve potential 
application of the "relevance rules" (FRE 404-411) or the 
"impeachment rules" (FRE 607-610). 36 in all of these evidentiary 
contexts, the resolution of the dispute by a reviewing court 
depends in part on whether the agency's evidentiary regulation 
incorporates the APA standard or the "so far as practicable" 
standard. In one important context, the standard adopted in the 
agency's evidentiary regulation is irrelevant to the resolution 
of the evidentiary dispute. Courts, agencies and commentators 
seem to be in agreement that all agencies must recognize claims 
of evidentiary privilege to the same extent that courts must 
recognize such claims. ^^ This rule makes eminently good sense 
because the reasons for recognizing evidentiary privileges differ 
fundamentally from the reasons that support adoption of most 
evidentiary rules. Evidentiary privileges exist not because they 
further the truth-seeking function, but because forced disclosure 
of some types of information will cause substantial harm to other 
social values. 38 since the harm resulting from forced disclosure 
of privileged information is identical whether the information is 
disclosed in a judicial proceeding or an administrative 
proceeding, the law of privileges should apply equally to both 
types of proceedings. 

It is important to distinguish between judicial constraints 
on agency discretion to admit evidence that would not be 
admissible in a federal court and judicial review of agency 
findings of fact premised on such evidence. The Supreme Court 



140 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

approved the relaxation of formal rules of evidence in agency 
proceedings as early as 1904. ^^ In 1916, however, the New York 
Court of Appeals announced the "legal residuum" rule in Carroll 
V. Knickerbocker . ^^ That rule permitted agencies to continue to 
admit and to consider evidence that would not be admissible in a 
jury trial. The Court held impermissible, however, agency 
reliance exclusively on such inadmissible evidence as the basis 
for a finding of fact. An agency could base a finding in part on 
evidence inadmissible in a jury trial, if but only if, it also 
had a "residuum of legal evidence" in the record to support the 
finding. 41 Until 1971, federal courts applied the "legal 
residuum" rule in reviewing agency actions--af ter 1946 as an 
integral part of the "substantial evidence" standard made 
applicable by the APA to agency findings of fact adopted in 
formal ad judications . ^2 

The "legal residuum" rule was the subject of near universal 
criticism both by evidence scholars and by administrative law 
scholars. 43 jn 1971, the Court finally responded to this 
criticism by abolishing the rule. In Richardson v. Perales ,44 
the Court held that an agency can base a finding on hearsay 
evidence that would be inadmissible in a jury trial, even when 
that evidence is contradicted by admissible evidence, if the 
evidence relied upon by the agency is of a type relied upon by a 
reasonably prudent person in conducting his affairs. Federal 
courts have applied this standard in reviewing agency findings of 
fact ever since--independent of whether the agency's evidentiary 
rule incorporates the APA standard of admissibility or the "so 
far as practicable" standard. Scholars have reacted to the 
abolition of the "legal residuum" rule with enthusiastic 
approval . 45 

II. SURVEY OF ADMINISTRATIVE LAW JUDGES 

Since ALJs preside over the majority of federal 
administrative adjudications, it seemed desirable to find out the 
extent to which they rely upon the FRE as a basis for their 
evidentiary ruling, as well as their opinions concerning the 
effectiveness of the rules they must apply and the evidentiary 
rules they would prefer to apply if they could change the rules 
now in effect at their agencies. To this end, a questionnaire 
was sent to 603 of the 1121 ALJs. Responses were received from 
212 ALJs, for a response rate of 35%. The distribution of 
responses by agency corresponded generally to the aggregate 
distribution of ALJs. 46 

The questionnaire included questions intended to elicit 
information in four areas: (1) the AL J ' s experiential basis for 
engaging in comparative evaluation of the evidentiary standard 
adopted by the agency for which she presides; (2) the ALJ ' s 
evaluation of the effectiveness of the evidentiary standard she 
is required to apply in terms of fairness to the parties. 



FEDERAL RULES OF EVIDENCE 141 

discretion to admit evidence the ALJ considers reliable, 
discretion to exclude evidence the ALJ considers unreliable, 
discretion to exclude evidence in the interests of expediting a 
proceeding, and sufficiency of guidance provided to permit 
rulings to be made promptly and with confidence in their 
accuracy; (3) the evidentiary standard the ALJ would prefer to 
use as the basis for evidentiary rulings; and, (4) the extent to 
which the ALJ uses the FRE as a source of guidance in making 
evidentiary rulings. 

The questionnaire results were divided into four groups for 
purposes of evaluating the pattern of responses — (1) ALJs at 
agencies other than the Social Security Administration (SSA) that 
have adopted the APA evidentiary standard, (2) ALJs at SSA, (3) 
ALJs at agencies that have adopted the FRE "so far as 
practicable" standard, and (4) ALJs at DOL, where the agency's 
evidentiary regulation refers to the FRE as a permissive source 
of guidance and incorporates several of the FRE explicitly . "^7 
ALJs at SSA were evaluated as a separate group to avoid potential 
distortion of the evaluation of the responses of ALJs at other 
agencies that have adopted the APA evidentiary standard. 
Arguably, the nature and function of SSA adjudications differ 
significantly from the nature and function of adjudicatory 
proceedings at other agencies. 48 Unarguably, ALJs at SSA 
constitute such a disproportionately large subset of total ALJs 
that their responses would swamp the evaluation of total 
responses. Of the 1121 federal ALJs, 760 preside at SSA. 
Similarly, 113 of the 212 responses received came from SSA ALJs. 
SSA dominates the group of ALJs who preside at agencies that have 
adopted the APA evidentiary standard to an even greater extent — 
113 of the 144 responses from this group came from SSA. 

Before reporting these disaggregated results, it is useful 
to note one generalization. A majority of ALJs in each of the 
three groups expressed the opinion that the evidentiary standard 
adopted by their agencies produced satisfactory results when 
judged with reference to each of the performance criteria 
mentioned on the questionnaire, and a majority of ALJs in each 
group expressed a preference for the evidentiary standard adopted 
by their agency. This result is ambiguous. It could give rise 
to an inference that the present disparate pattern of evidentiary 
regulations yields a near perfect matching of evidentiary regimes 
with the unique functions of each agency, e.g. , FCC and ICC 
should rely much more heavily on FRE than should FERC or FTC 
(although it is difficult to identify functional distinctions 
among these agencies that would support this theory) . 
Alternatively, the data could indicate merely that most ALJs, 
like most people, prefer not to change the rules under which they 
operate. I prefer the second explanation, in part because of 
significant differences among the groups in the size of the 
majority that expressed satisfaction with, and a preference for, 
the status quo, and in part because of the low level of 



142 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

experience with alternative evidentiary standards in all four 
groups. Of the 212 respondents, only 16 (7.5%) reported that 
their agency had changed its evidentiary standard during their 
tenure, and only 53 (25.2%) had presided at other agencies with 
different evidentiary standards. 

The results of the survey are shown in the following tables 

ALJS AT APA AGENCIES OTHER THAN SSA 

satisfied not satisfied 
fairness to parties 87.1% 12.9% 

discretion to admit 96.8% 3.2% 

reliable evidence 

discretion to exclude 83.9% 16.1% 

unreliable evidence 

discretion to exclude evidence 80.6% 19.4% 

to expedite a proceeding 

guidance to permit prompt 86.7% 13.3% 

and confident rulings 

Preferred Rules 

APA "so far as practicable" FRE 
77.4% 22.6% 0% 

Frequency of Use of FRE as Guidelines 

always frequently occasionally rarely never 
20.0% 40.0% 33.3% 3.3% 3.3% 



FEDERAL RULES OF EVIDENCE 143 

ALJS AT SSA 

satisfied not satisfied 
fairness to parties 85.5% 14.5% 

discretion to admit 96.4% 3.6% 

reliable evidence 

discretion to exclude 65.5% 34.5% 

unreliable evidence 

discretion to exclude evidence 70.1% 29.9% 

to expedite a proceeding 

guidance to permit prompt 81.1% 18.9% 

and confident rulings 

Preferred Rules 

APA "so far as practicable" FRE 
62.7% 33.6% 3.6% 

Frequency of Use of FRE as Guidelines 

always frequently occasionally rarely never 
8.1% 15.3% 32.4% 26.1% 9.0% 



ALJS AT "SO FAR AS PRACTICABLE" AGENCIES 

satisfied not satisfied 
fairness to parties 98.0% 2.0% 

discretion to admit 100.0% 0.0% 

reliable evidence 

discretion to exclude 100.0% 0.0% 

unreliable evidence 

discretion to exclude evidence 98.0% 2.0% 

to expedite a proceeding 

guidance to permit prompt 100.0% 0.0% 

and confident rulings 

Preferred Rules 

APA "so far as practicable" FRE 
4.4% 80.0% 15.6% 



144 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

Frequency of Use of FRE as Guidelines 

always frequently occasionally rarely never 

58.6% 34.5% 3.0% 0.0% 3.0% 

ALJS AT DOL 

satisfied not satisfied 
fairness to parties 100.0% 0.0% 

discretion to admit 100.0% 0.0% 

reliable evidence 

discretion to exclude 95.2% 4.8% 

unreliable evidence 

discretion to exclude evidence 90.5% 9.5% 

to expedite a proceeding 

guidance to permit prompt 100.0% 0.0% 

and confident rulings 

Preferred Rules 

APA "so far as practicable" FRE 
31.6% 47.4% 21.1% 

Frequency of Use of FRE as Guidelines 

always frequently occasionally rarely never 
36.8% 36.8% 15.9% 10.5% 0.0% 

The survey results support several other important 
inferences. The evidentiary standard adopted by an agency 
significantly affects the extent to which ALJs use the FRE as a 
source of guidance in making evidentiary rulings. 93.1% of ALJs 
at agencies with "so far as practicable" standards report that 
they use the FRE as a source of guidance either "always" or 
"frequently." This heavy reliance on the FRE contrasts sharply 
with the sparing reliance of ALJs at SSA — only 23.4% report use 
of the FRE "always" or "frequently." The degree of reliance 
reported by ALJs at DOL and APA agencies other than SSA falls 
between these two extremes, at 73.6% and 60.0%, respectively. 

The results of the survey with respect to ALJs' satisfaction 
with the evidentiary standard they are required to apply vary 
substantially depending on the criteria of satisfaction employed, 
ALJs in all groups report near unanimous satisfaction with the 
adequacy of their discretion to admit evidence they consider 
reliable — the satisfaction rate varied among the groups of ALJs 
only from 96.4% to 100.0%. There was slightly greater variation 



FEDERAL RULES OF EVIDENCE 145 

in the rate of satisfaction reported with respect to an ALJ ' s 
power to conduct a proceeding that is fair to the parties. As 
measured by this criterion, the results ranged from 100.0% 
satisfaction reported by DOL ALJs down to 85.5% satisfaction 
reported by ALJs at APA agencies — a degree of variation that 
probably is not significant in light of the relatively small 
number of respondents in the two groups. '^^ 

The variation in reported satisfaction with respect to other 
criteria is considerably greater. As measured by adequacy of 
discretion to exclude evidence an ALJ considers unreliable, the 
degree of satisfaction reported ranged from 65.5% to 100.0%. 
Similarly, the range of responses with respect to adequacy of 
discretion to exclude evidence in order to expedite a proceeding 
varied from 70.1% to 98.0%, and with respect to adequacy of 
guidance to make a prompt and confident evidentiary ruling the 
variation was from 81.1% to 100.0%. With respect to each 
criterion, ALJs at SSA and at other APA agencies reported the 
lowest rate of satisfaction with the evidentiary standard they 
are required to apply, while ALJs at DOL and at agencies with a 
"so far as practicable" standard reported the highest rate of 
satisfaction. 

It is apparent from the survey results that ALJs prefer the 
additional guidance and discretion to exclude evidence provided 
by the "so far as practicable" standard or the DOL standard, both 
of which refer to the FRE, to the open-ended APA standard. As 
interpreted and characterized by several of the respondents, the 
APA standard forces an ALJ to admit any evidence tendered even if 
the ALJ considers it clearly unreliable. The responses to the 
question asking ALJs which of three evidentiary standards they 
would prefer to apply reinforces this conclusion. While a 
majority of each group expressed a preference to retain the 
status quo, the size of the majority varied from only 62.7% of 
SSA ALJs who preferred to retain the APA standard adopted by that 
agency to 80.0% of ALJs at "so far as practicable" agencies who 
preferred to continue to apply that standard. Indeed, that 
variation understates the preference for the guidance and 
discretion to exclude provided by a standard that makes reference 
to the FRE for two reasons. First, of the 20.0% of "so far as 
practicable" 'ALJs who would prefer to apply a different standard, 
almost all (15.6%) expressed a preference for strict application 
of the FRE. Second, DOL ALJs were not given the option of 
expressing a preference to continue to apply the evidentiary 
standard unique to that agency. Had they been provided that 
option, it is fair to infer from their extremely high rate of 
reported satisfaction with the evidentiary standard they now 
apply (90.5% to 100.0% satisfaction depending on the criterion 
used) that they would have expressed near unanimous preference to 
retain that standard. 

The final step in deriving meaning from the survey results 



146 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

is to attempt to infer reasons for ALJs' preference for an 
evidentiary standard that includes either a mandatory or a 
permissive reference to the FRE. The satisfaction responses 
differed significantly with respect to three criteria--adequacy 
of discretion to exclude evidence considered unreliable, adequacy 
of discretion to exclude evidence in order to expedite a 
proceeding, and adequacy of guidance to make prompt and confident 
rulings. The latter two criteria relate to the managerial role 
of judges and agencies--how can we resolve tens of thousands of 
disputes in a timely manner with limited resources? This issue 
is critically important to many judges and agency administrators 
because of its direct relationship to the ability of any agency 
to perform its mission ef f ectively , ^^ but it is too often ignored 
by theorists. 

The first criterion seems initially to reflect a different 
type of concern entirely--that admission of unreliable evidence 
will result in injustice through an erroneous finding of fact. 
Upon analysis, however, the dissatisfaction expressed with 
respect to this criterion also relates to the managerial side of 
the administrative justice system. As several respondents noted 
in their comments, there is no real danger that a finding will be 
based on evidence an ALJ considers unreliable but feels compelled 
to admit anyway, since the ALJ will simply decline to rely upon 
such evidence in making findings. Several ALJs who expressed 
dissatisfaction with the APA standard with respect to this 
criterion explained in comments the basis for their 
dissatisfaction. If an ALJ feels compelled to admit unreliable 
evidence, she also feels compelled to provide the opponent of the 
unreliable evidence a complete opportunity to demonstrate the 
unreliability of the evidence through cross-examination and 
presentation of rebuttal evidence. Thus, ALJ dissatisfaction 
with the lack of discretion to exclude unreliable evidence 
provided by the APA standard seems to be premised on potential 
undue consumption of time.^l 

III. ANALYSIS AND RECOMMENDATIONS 

Three general types of evidentiary standards are now used by 
federal agencies-- (1 ) the FRE "so far as practicable" standard, 
(2) the wide-open APA standard, and (3) the DOL standard with its 
permissive reference to the FRE and selective incorporation of 
some federal rules. In this section, I will evaluate the 
strengths and weaknesses of each, argue in support of adoption of 
a standard of the type used by DOL, and suggest other changes in 
agency practices that offer the promise of allowing ALJs to make 
evidentiary rulings in a manner that will improve the quality of 
administrative justice. 

The "so far as practicable" Standard 

The survey of ALJs identified the major advantages of the 



FEDERAL RULES OF EVIDENCE 147 

FRE "so far as practicable" standard. ALJs prefer this standard 
to the open-ended APA standard because they perceive that it 
accords them both the guidance and the discretion to exclude low 
quality evidence. This in turn allows them to manage 
adjudications more effectively with less need to devote valuable 
hearing time to evidence they consider unreliable. 

Adoption of the "so far as practicable" standard has two 
major disadvantages, however. First, reviewing courts seem not 
to know what to make of it. ^2 some interpret it to require 
reversal of an agency if it admits evidence inadmissible in a 
jury trial unless the agency meets an apparently heavy burden of 
establishing that it was not "practicable" to follow the FRE in a 
particular instance. Others seem to indulge in the entering 
assumption that it is rarely "practicable" for an agency to 
follow the FRE. Still others apparently consider it reversible 
error for an agency to exclude evidence made inadmissible by the 
FRE without explaining why it adhered to the FRE in the 
circumstances. It is difficult to recommend a putatively 
mandatory standard that is subject to such a wide range of 
judicial interpretation. 

Second, if the standard is interpreted in a manner that 
effectively limits the discretion of agencies and ALJs to admit 
evidence that is inadmissible in a jury trial, the standard makes 
little sense. It is difficult for agency ALJs to apply the FRE 
to resolve close evidentiary disputes. Imposition of mandatory 
constraints on agency discretion to admit evidence serves no 
conceivable purpose. Moreover, it is inappropriate to limit 
expert agency decision-makers to consideration only of evidence 
that can be considered by lay jurors. 

The FRE are designed to further two goals — to avoid 
decisions based on unreliable evidence by precluding decision- 
makers from being exposed to such evidence and to promote 
efficiency in the trial process by excluding evidence of such low 
quality that the cost in the form of trial time required to 
receive and consider the evidence exceeds substantially the value 
of the evidence. 53 Thus, for instance, the 33 exceptions to the 
hearsay rule either instruct a judge to consider the reliability 
of the evidence directly or to base her ruling on characteristics 
of the evidence that are believed to function as rough surrogates 
for reliability . 54 jn contrast, FRE 403 provides a basis for 
excluding evidence that will require more time at trial than its 
value justifies. 54 a j^ this section, I will discuss only 
exclusionary rules, like the hearsay rules, that are designed to 
further the first goal. I will discuss FRE 403 and the second 
goal in the next section. 55 

As with any other area of law, application of the FRE 
presents both easy and hard cases. A set of mandatory 
exclusionary rules is totally unnecessary to permit ALJs to 



148 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

resolve the easy cases. If an item of proffered evidence is 
clearly unreliable, an ALJ does not have to be told to exclude 
the evidence because it is inadmissible under the FRE; she needs 
only the discretion to exclude it because it is unreliable. The 
many hard cases are, by definition, difficult for federal judges 
to resolve--particularly in the context of a trial in which a 
judge may be called upon to resolve promptly scores of difficult 
evidentiary controversies based on only a few minutes of argument 
and thought devoted to each. 

The risk that a judge will err in some close cases and 
exclude items of evidence that are sufficiently reliable and 
probative to warrant consideration is high. The cost of such 
errors is also high--remand for further hearings or a decision 
that is not based on all of the reliable evidence. Of course, we 
require federal judges to take this risk routinely in jury 
trials, so there are at least some circumstances when we consider 
it a risk worth taking. The question then must be asked: is an 
agency adjudication a context in which this risk is justified? 

There are three reasons why it makes little sense to take 
the risk of erroneous exclusion of reliable evidence through 
application of highly technical exclusionary rules in the context 
of agency adjudications. First, the cost of such errors is as 
great in the agency adjudication context as it is in the trial 
context--if the ALJ erroneously excludes reliable evidence, the 
agency must either remand for further proceedings or decide the 
case on the basis of an incomplete record. Second, the risk of 
errors of exclusion is greater in the agency adjudication context 
than in the context of a jury trial. Third, there are good 
reasons to take this risk in the jury trial context that do not 
exist in the case of agency adjudications. 

Prompt resolution of difficult evidentiary issues under the 
FRE presents even greater challenges and risks to agency ALJs 
than to federal trial judges. To resolve close evidentiary 
questions, a judge must focus specifically and with some care on 
the issues in the proceeding and on the relationship between a 
proffered item of evidence and those issues, for most such 
questions must be answered by reference to the purpose for which 
the evidence can be considered and its probative value when 
considered for that purpose. ^6 yet, agency ALJs often have an 
incomplete understanding of the issues at the time they must rule 
on the admissibility of evidence. ALJs, unlike federal judges, 
do not resolve cases subject only to possible appeal. Rather, 
they issue initial decisions that are, for most purposes, 
functionally equivalent to recommendations to agency decision- 
makers. ^"7 Since the ALJ is not the final decision-maker, she 
often has an imperfect understanding during the hearing of both 
the issues the agency ultimately will consider important and the 
probative value the agency will attach to various types of 
evidence with respect to those issues. 



FEDERAL RULES OF EVIDENCE 149 

The extent of an AL J • s understanding of the issues at the 
time of a hearing depends on the degree of specificity with which 
Congress has identified those issues in the agency's organic act 
and the extent to which the agency has increased that specificity 
by promulgating legislative rules. Far too frequently, Congress 
declines to establish meaningful statutory standards^o and the 
agency declines to issue regulations that create standards 
sufficient to permit ALJs to be confident that they know the 
issues in a proceeding or the probative value that the agency 
will attach to various types of evidence that arguably bear on 
those issues. 5^ As a result, agency ALJs frequently have a less 
complete understanding of the substantive legal principles that 
should inform their evidentiary rulings than do trial judges. 

The decision to take the risk of erroneous exclusion of 
evidence in jury trials is based in part on considerations of 
necessity that have no analogue in administrative adjudications. 
In a jury trial, there is little choice but to ask trial judges 
to resolve close evidentiary disputes through application of 
complicated and detailed exclusionary rules, and thereby to take 
the risk of a new trial or of a decision that is not based on all 
reliable evidence. In Dean Calabresi's words, juries are 
"aresponsible" decision-makers ,^0 in the sense that they are not 
required to explain the bases for their decisions, including 
particularly the evidentiary bases for their findings of fact. 
Thus, if we want to preclude juries from basing findings on 
evidence considered unreliable by judges, we can do so only by 
precluding their exposure to that evidence in the first place. 

The considerations are entirely different in agency 
adjudications . 61 Agencies and ALJs are required to state the 
bases for their findings of fact.62 Their findings are then 
subject to judicial review under the substantial evidence 
standard. 63 jf an agency finding is based on unreliable 
evidence, the agency's action is reversed. Thus, there is a 
mechanism available in agency adjudications independent of 
rulings on the admissibility of evidence to insure that agency 
findings are based only on reliable evidence. 

The independent mechanism available in agency adjudications 
offers enormous advantages over the instant evidentiary ruling 
during a trial that provides the only effective means of insuring 
that juries do not base findings on unreliable evidence. The on- 
the-spot resolution of close evidentiary issues during a trial 
undoubtedly results in many erroneous exclusions of reliable 
evidence because trial judges have little opportunity to reflect 
on the reliability of an item of proffered evidence before 
ruling. The need for instant rulings also requires judges to use 
the many imperfect surrogates for reliability embedded in the FRE 
because it is easier to apply objective surrogates rapidly than 
to evaluate reliability directly. Evidentiary rulings in jury 



150 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

trials also must be made in many cases at such an early stage of 
the proceeding that judges cannot assess accurately some of the 
factors, such as incremental probative value, that are important 
to evidentiary decisions. ^^ 

By contrast, if agency ALJs defer all close decisions 
concerning the reliability of proffered evidence by admitting all 
evidence that might be sufficiently reliable to justify 
consideration, they can make reliability decisions at a time when 
their decisions are more likely to be accurate. As they read the 
record and begin to draft their opinion, they can reflect on the 
entirety of the evidence submitted and base their reliability 
determinations on each item of evidence as it relates to other 
evidence and to the issues as they then understand those issues. 
Equally important, the agency decision-makers can engage in the 
same careful process of deciding which evidence is sufficiently 
reliable to warrant consideration in resolving the issues as they 
see them. Since a principal role of agencies is to make policy 
decisions Congress has declined to make,^^ agencies frequently 
focus on a set of issues and evidence different from the issues 
and evidence the ALJ believed to be important. Once the agency 
has completed this process, a reviewing court can perform the 
important function of insuring that no finding is predicated on 
unreliable evidence. 

Advocates of application of the FRE to agency adjudications 
seem to ignore completely the major functional differences 
between the role of the FRE in jury versus non-jury proceedings. 
While the FRE apply putatively to both types of proceedings, 
judges do not apply them in the same manner in jury and non-jury 
cases. Indeed, appellate courts consistently admonish trial 
judges to resolve all close evidentiary disputes in favor of 
admission in non-jury cases. The landmark decision on this issue 
is the Eighth Circuit's oft-cited 1950 opinion in Builders Steel 
Co. V. Commissioner . 66 The reasoning in that opinion applies a 
fortiori to the agency adjudication context: 

In the trial of a nonjury case, it is 
virtually impossible for a trial judge to 
commit reversible error by receiving 
incompetent evidence, whether objected to or 
not. An appellate court will not reverse a 
judgment in a nonjury case because of the 
admission of incompetent evidence, unless all 
of the competent evidence is insufficient to 
support the judgment or unless it affirmatively 
appears that the incompetent evidence induced the 
court to make an affirmative finding which would 
not otherwise have been made. 67 



FEDERAL RULES OF EVIDENCE 151 

One who is capable of ruling accurately upon the 
admissibility of evidence is equally capable of sifting 
it after it has been received, and, since he will base 
his findings upon the evidence he regards as competent, 
material and convincing, he cannot be injured by the 
presence in the record of evidence which he does not 
consider competent or material. 

If the record on review contains not only all 
evidence which was clearly admissible, but all evidence 
of doubtful admissibility, the court which is called 
upon to review the case can usually make an end of it, 
whereas if evidence was excluded which that court 
regards as having been admissible, a new trial or 
rehearing cannot be avoided. ^^ 

It seems anomolous for Congress or an agency to purport to 
require ALJs to exclude evidence they believe to be inadmissible 
under the FRE when appellate courts uniformly instruct federal 
trial judges to resolve all close cases in favor of admission in 
nonjury cases. Each of the factors that cause appellate courts to 
give this guidance to trial judges applies with at least equal 
force to agency ALJs. Indeed, there are powerful additional 
reasons ALJs should resolve all close cases in favor of admission. 

Agencies do not merely perform the decisional review function 
assigned to appellate courts; they make decisions, frequently on 
the basis of considerations quite different from those that 
influenced the ALJ. Thus, it is more important that agencies have 
access to all evidence that even arguably is sufficiently reliable 
to warrant consideration than it is for appellate courts to have 
access to such evidence. In addition, agencies, unlike courts, 
can base findings on evidence inadmissible under the FRE if a 
reviewing court concurs in the agency's judgement that the 
evidence is sufficiently reliable. ^9 Thus, it seems foolish to 
instruct ALJs to exclude evidence based on a set of rules that 
bars a large class of evidence that the agency could use as a 
basis for action if the evidence ever reached the agency decision- 
maker. Of course, an agency decision-maker is always free to 
disregard an item of evidence inadmissible under the FRE if she 
believes it.tg be unreliable. Instructing ALJs to exclude all 
evidence inadmissible under the FRE has the effect, however, only 
of removing the agency decision-maker's discretion to consider 
evidence she and a reviewing court believe to be sufficiently 
reliable to justify consideration. 

It is not only difficult, risky, and unnecessary to instruct 
ALJs to exclude evidence made inadmissible by the FRE, it is 
inappropriate to ask them to perform this task because agencies 
should have the discretion to rely on such evidence if it is 
reliable. The FRE themselves support this proposition. 



152 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

Most of the FRE, and in particular the elaborate rules 
governing the admissibility of hearsay, are predicated on the 
assumption that the issue is whether an item of evidence is 
suitable for consideration by a lay decision-maker . ^0 The FRE 
also have provisions that deal explicitly with the issue of 
whether an item of evidence is suitable for consideration by an 
expert. FRE 703 permits an expert to base an admissible opinion 
on inadmissible evidence if that evidence is "of a type reasonably 
relied upon by experts in the . . . field . . . .""^l The courts 
have interpreted FRE 703 to permit an expert to base an opinion on 
inadmissible but reliable hearsay. ^2 Further, they have held that 
the scientific community's view of reliability governs, rather 
than a court's view.^^ Thus, the trial judge's role is to 
determine through factual investigation whether an item of 
inadmissible evidence used as the basis for an expert opinion is 
considered reliable by other experts in the field. The judge is 
not to decide whether the evidence meets the judge's threshold of 
reliability or whether it conforms to the surrogates for 
reliability selected by the drafters of the FRE to determine 
whether nonexperts can use an item of evidence as the basis for an 
opinion or conclusion. 

Agency decision-makers are experts, not lay jurors or lay 
witnesses. As such, the findings and opinions of agency decision- 
makers should be governed by the same pragmatic standard used both 
by the courts and by the drafters of the FRE to determine whether 
an item of evidence is sufficiently reliable to form the basis for 
an expert opinion. Once that proposition is accepted--and the 
Supreme Court accepted it in Richardson v. Perales ^'^--it makes no 
sense for Congress or an agency to attempt to restrict an AL J ' s 
discretion to admit evidence solely because that evidence is not 
admissible in a jury trial. In summary, the "so far as 
practicable" standard should be abandoned because: (1) courts do 
not know what it means or how to enforce it; (2) instructing ALJs 
to exclude evidence based on the standard forces them to undertake 
a difficult and hazardous task; (3) excluding evidence on the 
basis that it is inadmissible in a jury trial is totally 
unnecessary to insure that agencies take actions based only on 
reliable evidence; and, (4) agencies, like other experts, should 
be permitted to rely upon classes of evidence broader than those 
that can be considered by lay jurors. 

The APA Standard 

The advantages of the wide-open APA standard are apparent 
from the prior description of the disadvantages of the "so far as 
practicable" standard. The APA standard does not cause confusion 
among reviewing courts; nor does it require ALJs to undertake a 
task that is difficult, risky, unnecessary, and counterproductive. 
The APA standard alone also has difficulties, however, as the 
survey of ALJs indicates. 



FEDERAL RULES OF EVIDENCE 153 

ALJs expressed less satisfaction with the APA standard than 
with a standard that makes reference to the FRE.75 That relative 
dissatisfaction was based primarily on frustration that the APA 
standard does not provide an adequate tool to permit an ALJ to 
perform her case management role. ALJs perceive that the APA 
standard provides no basis for excluding evidence even if it is 
patently unreliable or its probative value is so low that it does 
not justify the amount of hearing time it would require. This is 
a serious disadvantage. The delay and high cost of the 
administrative process poses a severe threat to the quality of 
justice available in our modern administrative state. ^^ Admission 
and cross-examination of a large volume of low quality evidence 
contributes significantly to the extraordinary length and 
attendant high cost of many agency adjudications. 

The APA standard alone authorizes an ALJ to exclude an item 
of evidence only if it is "irrelevant, immaterial or unduly 
repetitious."^^ Read literally, this standard confers discretion 
to exclude very little evidence. The modern threshold for 
determining relevance and materiality is extremely low.^^ The 
apparently independent basis for excluding evidence as unduly 
repetitious may be helpful in extreme circumstances, but it seems 
to provide authority to exclude evidence that meets the low 
relevancy threshold only if the evidence is virtually identical to 
other evidence already in the record. 

The inadequacy of the APA standard alone as a case management 
tool becomes apparent when it is compared with the FRE. 
Independent of the technical exclusionary rules that are designed 
to insulate lay jurors from arguably unreliable evidence, the FRE 
provide federal trial judges a powerful tool to permit them to 
exercise their case management responsibilities in an effective 
manner. FRE 403 permits exclusion of relevant and material 
evidence if the probative value of that evidence is substantially 
outweighed by any of several counterweights, specifically 
including "considerations of undue delay. "^^ 

To illustrate the difference between the APA standard alone 
and an evidentiary standard that incorporates FRE 403, consider a 
hypothetical situation that recurs frequently in agency 
adjudications.. A party (perhaps a party with a motive for delay) 
proffers a voluminous exhibit tangentially related to an issue in 
the case and based entirely on low quality second and third hand 
hearsay information. The ALJ is confident that neither she nor 
the agency will rely on the exhibit for any purpose. She also 
knows, however, that typical conservative counsel for the opposing 
parties will insist on cross-examining the witness responsible for 
the exhibit at length and on presenting similar low quality 
rebuttal exhibits if the ALJ admits the originally proffered 
exhibit. Thus, admission of the exhibit will lengthen the 
proceeding significantly. 



154 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

The ALJ would like to exclude the exhibit, thereby 
substantially truncating the hearing and hastening the day when 
the agency ultimately can decide the case. Yet the APA standard 
alone provides no clear authority to exclude the exhibit, no 
matter how low its quality or how much it is likely to prolong the 
proceeding. The exhibit meets the low modern threshold for 
determining relevance and materiality and, it is probably not 
unduly repetitious unless the ALJ already has admitted a similar 
exhibit. Under the APA standard alone, the ALJ may feel compelled 
to admit the exhibit. By contrast, FRE 403 provides the ALJ the 
additional tool she requires to engage in responsible case 
management in this frequently recurring situation. Even though 
the exhibit is relevant, she can exclude it under FRE 403 because 
its probative value is substantially outweighed by considerations 
of undue delay. 

Since the balancing test in FRE 403 is weighted in favor of 
admission, the ALJ will continue to resolve close cases by 
admitting a controversial item of evidence, just as federal trial 
judges now do in non-jury cases. Hence, exercise of the 
discretion conferred by FRE 403 raises little risk of an agency or 
court remand because an ALJ erroneously excluded an item of 
evidence. Appellate courts accord substantial deterrence to trial 
judge applications of FRE 403.^0 Agencies and reviewing courts 
should accord analogous deference to ALJ applications of FRE 403 
in recognition of the AL J ' s greater familiarity with the situation 
at trial and the difficulty of the ALJ ' s task in exercising her 
case management responsibilities. Because of the combination of 
ALJ resolution of all close cases in favor of admission and agency 
and court deference to ALJ evidentiary rulings applying FRE 403, 
authorizing ALJs to apply FRE 403 does not raise the serious and 
unnecessary risks inherent in instructing ALJs to apply the myriad 
complicated and technical provisions of the FRE that are designed 
to control jury trials. ^^ 

The POL Standard 

The DOL standard82 seems to eliminate the disadvantages of 
both the "so far as practicable" standard and the APA standard. 
It creates no confusion for reviewing courts because its reference 
to the FRE is permissive rather than mandatory. For the same 
reason, it does not impose a difficult, risky and 
counterproductive responsibility on ALJs. At the same time, the 
DOL regulation provides ALJs a basis for managing the cases that 
come before them. They have a clear basis to exclude evidence 
whose incremental contribution to the fact-finding process does 
not justify the amount of hearing time its admission would 
require. The DOL regulation incorporates the most powerful tool 
available to federal trial judges to expedite proceedings and to 
keep unreliable evidence from cluttering the record, absorbing 
valuable trial time, and delaying a decision in the case--FRE 403. 
Judging from the high rate of satisfaction reported by DOL ALJs,83 



FEDERAL RULES OF EVIDENCE 155 

the DOL regulation allows ALJs to perform their case management 
function far more effectively than does the APA standard alone. 

On balance, the approach taken by Congress and DOL in the 
process of adopting an evidentiary regulation to govern agency 
adjudications seems far preferable to the alternatives now in 
effect at other agencies. Congress should limit its role in the 
process of establishing agency evidentiary rules to incorporation 
of the APA standard. If Congress actually wants to attach special 
limits on the type of evidence that a particular agency can use as 
the basis for its findings of fact — and it is hard to identify any 
good reason for this action^^ — it should do so directly by 
establishing a special, more demanding definition of substantial 
evidence applicable to that agency, rather than attempting to 
further this goal indirectly through the awkward process of 
limiting the evidence an ALJ can admit. 

Agencies also should refrain from imposing on ALJs the 
straight jacket of the FRE. Instead, agencies should provide as 
much guidance as possible, including adoption of the weighted 
balancing test of FRE 403, to enable ALJs to perform their 
important case management function. Agencies also can assist ALJs 
materially by announcing in advance of adjudications--preferably 
through the rulemaking process — the substantive standards the 
agency intends to apply in resolving various classes of 
adjudications. 85 ^n evidentiary rulings must be based on a good 
understanding of the substantive issues in dispute. 



156 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

FOOTNOTES 

* George W. Hutchison Professor of Law, Southern Methodist 

University School of Law. B.S. 1965, Lehigh University; J.D. 
1972, University of Virginia. The author served as 
consultant to the Administrative Conference with respect to 
the recommendation that is the subject of this article. 
While the Conference adopted the recommendation, it did not 
vote on or approve in any way this article or the report from 
which the article was derived. The author wishes to 
acknowledge the assistance of Michael Lloyd and Richard 
Sedory, University of Pittsburgh School of Law, Class of 
1986, who provided research assistance for this article. 
Special thanks are due also to Richard Berg, who provided 
many helpful comments on the article. 

1. The goals stated are based on the author's interpretation of 
the debate that preceded passage of the recommendation. The 
Conference has not adopted this, or any other, set of goals 
underlying adoption of the recommendation. 

2. See , e.g. , 29 U.S.C. section 160(B) (purporting to mandate 
use of FRE in National Labor Relations Board adjudications 
"so far as practicable." 

3. FRE 801-805. 

4. See K. Davis, Administrative Law Treatise §16.5 (1980). 

5. The consultant's report has been revised to enhance 
consistency with the final version of the recommendation and 
the debate preceding adoption of the recommendation. 

6. A substantial majority of federal agencies merely recite or 
paraphrase the evidentiary provision in the Administrative 
Procedure Act, 5 U.S.C. section 556(d). That provision 
neither establishes nor refers to any rules of evidence. See 
text accompanying notes 18 through 23. 

7. 29 C.F.R. section 18.44 (Department of Labor). 

8. E.g. , 29 C.F.R. section 102.29 (National Labor Relations 
Board); 43 C.F.R. section 4.122 (Department of Interior Board 
of Contract Appeals) . 

9. Davis, Hearsay in Administrative Hearings, 32 Geo. Wash. L. 
Rev. 689 (1964); Davis, The Residuum Rule in Administrative 
Law, 28 Rocky Mountain L. Rev. 1 (1955); Davis, Evidence 
Reform: The Administrative Process Leads the Way, 31 Minn. 
L. Rev. 581 (1950); Davis, An Approach to Problems of 
Evidence in the Administrative Process, 55 Harv. L. Rev. 364 
(1942) . 



FEDERAL RULES OF EVIDENCE 157 

10. Gellhorn, Rules of Evidence and Official Notice in Formal 
Administrative Hearings, 1971 Duke L. Rev. (1971). 

11. 402 U.S. 389 (1971) . 

12. E.g. , Note, The Substantial Evidence Rule in Administrative 
Proceedings: Restrictions on the Use of Hearsay Since 
Richardson v^ Perales, 36 Ark. L. Rev. 102 (1983); Note, 
Administrative Law — Evidence — Residuum Rule — U nemployment 
Compensation Board of Review v. Ce ja , 20 Duq. L. Rev. 343 

(1982); Note, Administrative Law — Hearsay Evidence — 
Uncorroborated Hearsay Evidence Will Not Support a Factual 
Finding in Unemployment Compensation Proceedings — Ceja, 87 
Dick. L. Rev. 193 (1982). 

13. E.g. , Note, The Good Faith Exception to the Exclusionary 
Rule: Should It Apply to OSHA Enforcement Proceedings? 9 U. 
Dayton L. Rev. 95 (1983); Note, The Exclusionary Rule and Its 
Applicability to OSHA Enforcement Proceedings, 12 U. Bait. L. 
Rev. 1 (1982) . 

14. See J. Mashaw, C. Goetz, F. Goodman, W. Schwartz, P. Verkuil 
& M. Carrow, SOCIAL SECURITY HEARINGS AND APPEALS (1978); 
Pierce, The Choice Between Adjudicating and Rulemaking for 
Formulating and Implementing Energy Policy, 31 Hastings L.J. 
1 (1979). 

15. Federal Rules of Evidence, Pub. L. 93-595; 88 Stat. 1926 
(1975) . 

16. Some ALJs "always" rely on the Federal Rules, while other 
ALJs "never" or "rarely" rely on the Federal Rules. See 
tables on in text. 

17. E.g. , NLRB v. Process and Pollution Control Co., 588 F.2d 786 
(10th Cir. 1978); Helena Laboratories Corp. v. NLRB, 557 F.2d 
1183 (5th Cir. 1977); NLRB v. Addison Shoe Corp., 450 F.2d 
115 (8th Cir. 1971) . See also text at notes 33-35. 

18. 5 U.S.C. section 556(d). 

19. See Sen. Doc. No. 248, 79th Cong., 2d Sess. 30, 208, 270 
(1946); Report of the Attorney General's Committee on 

Administrative Procedure 70-71 (1941) . See also K. Davis, 
supra note 4, at section 16.4 (1980). 

20. E.g. , 42 U.S.C. section 7171(G) (Federal Energy Regulatory 
Commission must comply with APA section 556) . 

21. 29 U.S.C. section 160(B). 

22. Compare 39 C.F.R. section 916, with 39 C.F.R. section 952 



158 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

(differing rules of Postal Service) . 

23. 29 U.S.C. section 160(B). 

24. 29 C.F.R. section 2200.72. 

25. 43 C.F.R. section 4.122. 

26. 49 C.F.R. section 1100.75. 

27. 47 C.F.R. section 1.351. 

28. 29 C.F.R. section 18.44. 

29. SCM V. Xerox Corp., 77 F.R.D. 10 (D. Conn. 1977) (limiting 
number of days in which parties could present evidence under 
FRE 403) . 

30. E.g. , FTC v. Cement Institute, 333 U.S. 683, 705-06 (1948); 
Opp Cotton Mills V. Administrator, 312 U.S. 126, 155 (1941); 
Evosevich v. Consolidated Coal Co., 789 F.2d 1021 (3d Cir. 
1986) . 

31. E.g. , NLRB v. Maywood Do-nut Co., 659 F.2d 108 (9th Cir. 
1981); Catholic Medical Center v. NLRB, 589 F.2d 1166 (2d 
Cir. 1978); NLRB v. Jacob E. Decker & Sons, 569 F.2d 357 (5th 
Cir. 1978) . 

32. See Catholic Medical Center v. NLRB, 589 F.2d 1166, 1170. 

33. 588 F.2d 786. 

34. 557 F.2d 1183. 

35. 450 F.2d 115. 

36. E.g. , NLRB v. Jacob E. Decker & Sons, 569 F.2d 357 (prior 
felony convictions are admissible if their probative value 
exceeds their potential for unfair prejudice) . 

37. E.g. , CAB v. Air Transport Ass'n, 201 F. Supp. 318 (D.D.C. 
1961). See also K. Davis, supra note 4, at section 16.10. 

38. R. Lempert & S. Saltzburg, A MODERN APPROACH TO EVIDENCE 645- 
651 (2d ed. 1982) . 

39. ICC V. Baird, 194 U.S. 5 (1904). 

40. 218 N.Y. 435, 113 N.E. 507 (1916). 

41. 218 N.Y. 435, 440, 113 N.E. 507, 509. 



FEDERAL RULES OF EVIDENCE 159 

42. 5 U.S.C. section 706 (2) (E). See also Universal Camera Corp. 
V. NLRB, 340 U.S. 474 (1951). 

43. K. Davis, supra note 4, at section 16.6; C. McCormick, 
EVIDENCE 126 (1954); J. Wigmore , EVIDENCE section 4(b) 
(1940); Gellhorn, supra note 10. 

44. 402 U.S. 389. 

45. E.g. , K. Davis, supra note 4, at section 16.7. 

46. The selection of a sample of ALJs to receive the 
questionnaire was not scientific. The Administrative 
Conference had access to a mailing list that included the 
addresses of only 603 of the 1121 ALJs. The distribution of 
responses seems representative, however. The respondents 
from agencies that incorporate or paraphrase the APA 
evidentiary standard serve at the following agencies: SSA 

(113) , mine safety (5) , EPA (4) , SEC (4) , FLRA (4) , DOA (4) , 
ITC (2), FERC (2), FTC (1), FDA (1), DEA (1), NTSB (1), HUD 
(1), and NRC (1). The respondents from agencies whose 
evidentiary standard includes a reference to the FRE serve at 
the following agencies: NLRB (23), DOL (21), FCC (8), ICC 
(3) , DOI (3) , OSHRC (3) , Coast Guard (3) , USPS (2) , export 
administration (1) , FMC (1) , and SEA (1) . 

47. Most SSA adjudications are not adversarial; neither the 
claimant nor the government is represented at the hearing. 
It is difficult to envision how any set of evidentiary rules 
could be applied in this type of proceeding. Most claimants, 
with no knowledge of the rules of evidence, could be expected 
to experience confusion and frustration when told by an ALJ 
that some of their evidence had been rejected on the basis of 
some "technicality" beyond their ken. The few claimants 
represented by counsel would enjoy a significant advantage, 
since their evidentiary arguments would be unopposed. 

48. In recognition of the difficulty of applying evidentiary 

rules to nonadversarial hearings involving pro se litigants, 
many of the SSA ALJs who expressed a preference to adopt an 
evidentiary standard that included a reference to the FRE 
commented that such a change could occur only if SSA also 
adopted an adversarial system in which both the claimant and 
the government are represented by counsel. Such a change 
would increase the cost of administering the Social Security 
Disability system dramatically with little, if any, 
improvement in the quality of justice provided by that 
system. See Mathews v. Eldridge, 424 U.S. 319 (1976) 
(refusing to require counsel at government expense in 
disability proceedings on the basis that the cost of the 
added procedural safeguard would exceed its benefits.) See 
also J. Mashaw, BUREAUCRATIC JUSTICE: MANAGING SOCIAL 



160 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

SECURITY DISABILITY CLAIMS (1983) (emphasizing the limited 
extent to which expensive judicially imposed safeguards can 
improve the quality of a mass justice system in contrast to 
the substantial improvements potentially available through 
implementation of less expensive internal quality control 
mechanisms.) See generally R. Pierce, S. Shapiro, and P. 
Verkuil, ADMINISTRATIVE LAW AND PROCESS 255-277 (1985). 

Because of the unique features of SSA adjudications, the 
Conference specifically exempted such "non adversarial" 
proceedings from the scope of Recommendation 86-2. 

49. Twenty-one ALJs at DOL and thirty-one ALJs at APA agencies 
other than SSA responded to the questionnaire. 

50. See Pierce, supra note 14; Mashaw, supra note 14. 

51. Some respondents also complain that reviewing courts 
sometimes require explicit discussion even of clearly 
unreliable evidence. Under the "adequate consideration" 
doctrine, an ALJ and an agency risk potential remand if they 
fail to consider explicitly all arguably relevant evidence. 
See R. Pierce, S. Shapiro & P. Verkuil, supra note 48, at 
380-413. Thus, lack of discretion to exclude unreliable 
evidence also can force an ALJ to devote scarce opinion- 
writing time to explaining why she chose not to rely on 
unreliable evidence she felt compelled to admit. 

52. See text accompanying notes 28-30. Agencies also experience 
difficulty attempting to interpret and apply the "so far as 
practicable" standard. OSHRC has proposed to abandon its use 
of the standard because it has been unable to define and 
apply the standard in an acceptable manner. 51 Fed. Reg. 
23184, 23190 (June 25, 1986). Unfortunately, OSHRC has 
proposed to become the first federal agency to adopt the even 
less appropriate standard of strict application of the FRE. 
See text accompanying notes 53-70. 

53. See M. Graham, Federal Rules of Evidence 82-83 (1981); G. 
Lilly, An Introduction to the Law of Evidence 3-4 (1978). 

54. R. Lempert and S. Saltzburg, supra note 38, at 498-505. 
54a. M. Graham, supra note 53, at 82-83. 

55. See text accompanying notes 75-83. 

56. Evidence of prior crimes, for instance, can be considered 
only for some purposes (FRE 404 and 609) and only when its 
probative value for those purposes exceeds its potential for 
unfair prejudice or undue expenditure of time. See U.S. v. 
Beechum, 582 F.2d 898 (5th Cir. 1978). More generally, it is 



FEDERAL RULES OF EVIDENCE 161 

impossible to determine whether an item of proffered evidence 
is hearsay without first determining the purposes for which 
it may be used by the decision-maker. See Tribe, 
Triangulating Hearsay, 87 Harv. L. Rev. 957 (1974). 

57. See K. Davis, supra note 4, at section 17.14. 

58. See Pierce, The Role of Constitutional and Political Theory 
in Administrative Law, 64 Texas L. Rev. 469, 472-481 (1986). 

59. See Estreicher, Policy Oscillation at the Labor Board: A 
Plea for Rulemaking, 37 Ad. L. Rev. 163 (1985). For a 
discussion of the practical problems posed by an agency's 
failure to specify the issues in advance of an adjudication, 
see Pierce, supra note 14, at 34-35. See also Robinson, The 
Making of Administrative Policy: Another Look at Rulemaking 
and Adjudication and Administrative Procedure Reform, 118 U. 
Pa. L. Rev. 485, 524-45 (1970). 

60. G. Calabresi and P. Bobbitt, TRAGIC CHOICES 57 (1978). 

61. Gellhorn, supra note 10, at 17-18. 

62. R. Pierce, S. Shapiro, & P. Verkuil, supra note 48, at 
section 6.4.3d. 

63. Id. , at section 7.3. 

64. In recognition of this serious problem, appellate courts 
frequently encourage trial judges to defer ruling on 
difficult evidentiary issues until late in a trial. E.g., 
U.S. V. Beechum, 582 F.2d 898. 

65. Pierce, supra note 58, at 505-508. 

66. 179 F.2d 377 (8th Cir. 1950). Accord Fields Eng. & Equip., 
Inc. V. Cargill, Inc., 651 F.2d 589, 594 (8th Cir. 1981); 
Multi-Medical Convalescent and Nursing Center v. NLRB, 550 
F.2d 974, 977 (4th Cir. 1977); Northwestern Nat. Casualty Co. 
V. Global Moving and Storage Inc., 533 F.2d 320, 324 (6th 
Cir. 1976.) . 

67. 179 F.2d at 379. 

68. Id^ 

69. Richardson v. Perales, 402 U.S. 389 (1971). 

70. K. Davis, supra note 4, at section 16.3; Gellhorn, supra note 
10, at 17-22. 

71. FRE 703. 



162 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

72. Au Rust Proofing Center, Inc. v. Gulf Oil Corp., 755 F.2d 
1231 (7th Cir. 1985); Greenwood Util. Comin. v. Mississippi 
Power Co., 751 F.2d 1484 (5th Cir. 1985); In re Japanese 
Electronic Producer's Antitrust Litigation, 723 F.2d 238 (3d 
Cir. 1983), rev' d on other issues sub nom. Matsushita Elec. 
Indus. Corp. v. Zenith Radio Corp., 106 S. Ct. 1348 (1986); 

73. E.g. , Indian Coffee Corp. v. Procter & Gamble Co., 752 F.2d 
891 (3d Cir. 1985) . 

74. 402 U.S. 389. 

75. See tables in text. 

76. See Senate Comm. on Governmental Affairs, Study on Federal 
Regulation Vol. IV, Delay in the Regulatory Process, S. Doc. 
No. 95-72, 95th Cong., 1st Sess. (1977). See also Pierce, 
supra note 14. 

77. 5 U.S.C. section 556(d). 

78. See FRE 401 and Advisory Committee's Note, 56 F.R.D. 183, 
215. 

79. See FRE 403 and Advisory Committee's Note, 56 F.R.D. 183, 
218. See also Pierce, Admissibility of Expert Testimony in 
Hearsay Form, 5 Am. J. Trial Adv. 277, 279-283 (1981); 
Slough, Relevancy Unraveled, 5 Kan. L. Rev. 1 (1956). 

80. See , e.g. , Stengel v. Belcher, 522 F.2d 438 (6th Cir. 1975). 

81. See text accompanying notes 52-74. 

82. 29 C.F.R. section 18.44. 

83. See table in text. 

84. See text accompanying notes 69-74. 

85. Agencies vary widely with respect to the extent to which they 
apprise the ALJ and the parties in advance of the issues they 
consider important in an adjudicatory proceeding and the 
types of evidence they consider probative of those issues. 

At one extreme, NLRB rarely issues rules and frequently 
changes its policies in adjudicatory disputes with no advance 
notice. See Estreicher, supra note 59. See also Bernstein, 
The NLRB ' s Adjudication Rulemaking Dilemma Under the 
Administrative Procedure Act, 79 Yale L.J. 571 (1970) . By 
contrast, SSA has materially assisted ALJs by resolving some 
recurring factual issues by rulemalcing, identifying with 
specificity other factual issues through rulemaking, and 



FEDERAL RULES OF EVIDENCE 163 

publishing guidelines concerning the relative reliability of 
various types of evidence when considered in resolving 
recurring issues. See ^ e.g. ^ Heckler v. Campbell, 461 U.S. 
458 (1983) (affirming SSA rule establishing grid system for 
determining availability of various types of jobs) . See also 
20 C.F.R. sections 404.708-780 (guidelines describing 
"preferred evidence" and "other evidence" relevant to a 
variety of recurring issues) . 



BACKGROUND REPORT FOR RECOMMENDATION 86-3 



POINTS ON A CONTINUUM: 
DISPUTE RESOLUTION PROCEDURES AND THE ADMINISTRATIVE PROCESS 



Philip J. Harter 



Report to the Administrative Conference of the United States 
June 5, 1986* 



(To be published in American University Journal of Administrative Law, volume 1 

number 1, 1987) 



166 



ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 
TABLE OF CONTENTS 
I 



INTRODUCTION 



Administrative Experimentation, 
Interest in Dispute Resolution. 
Contested Issues. 



II 



OVERVIEW OP THE ALTERNATIVES 



Arbitration. 

Med-Arb. 

Factfinding. 

Minitrial. 

Mediation. 

FacUitating. 

Convening. 

Conciliation 

Negotiation. 



m 

ADMINISTRATIVE ARBITRATION 



Voluntary versus Mandatory. 

Nature of Arbitration. 

Private Neutral. 

Parties Choose Arbitrator. 

Parties Can Select the Norm. 

Flexible Procedure . 

Award. 



Finality. 
Quality Control. 

Benefits/Uses. 
Drawbacks. 

Administrative Arbitration 

Varieties of Administrative Arbitration 

TABULAR SUMMARY OF VARIETIES OF ADMINISTRATIVE ARBITRATION 



DISPUTE RESOLUTION PROCEDURES 167 

IV 
THE LEGAL ISSUES OF ADMINISTRATIVE ARBITRATION. 

Statutory Limitations when the Government is a Party. 

Article III 

Article II: Requirement for Executive Decisions 

Delegation to Private Parties 

Due Process 

Unconstitutional Taking 

Standardless Delegation 

Conclusion: Properly Executed Arbitration Programs are Constitutional 

V 
HYBRID PROCESS 

The Arbitrators. 

Norms and Precedents. 

Record and Explanation. 

Privacy. 

Review by the Agency. 

Judicial Review 

No Review; Waiver 

Limited . 

Arbitrary or Capricious , 

VI 
CONCLUSION WITH RESPECT TO ADMINISTRATIVE ARBITRATION 

VII 
AGENCY OVERSIGHT OF PRIVATE DISPUTE RESOLUTION MECHANISM 

VIII 
MINITRIALS . 

Minitrial Procedure. 

Use by Government Agencies. 

When and for Which Cases Should the Government Consider Using Minitrials? 

NASA Minitrial. . 

Nature of the Dispute . 

Scope of Litigation . 

Motivations to use the Minitrial. 



168 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

The Procedure 

Army Corps of Engineers Use of the Minitrial 

Industrial Contract ors 
Tenn-Tom 

IX 
SETTLEMENT TECHNIQUES 

Need for Structure to Facilitate Settlements 

Overview of Techniques 

X 

CONCLUSION: WHERE DO WE GO FROM HEREt 

APPENDIX I 

SURVEY OF DISPUTE RESOLUTION METHODS 

USED IN THE 

ADMINISTRATIVE PROCESS 

Department of Commerce. 

Office of Export Enforcement . 

Office of Anti-Boycott Compliance 

National Oceanic and Atmospheric Administration . 

Personnel Law Division 

Federal Emergency Management Agency 

Commodity Futures Trading Commission. 

Consumer Product Safety Commission. 

Department of Agriculture. 

Packers and Stockyard Division . 
Natural Resources Division. 

Department of Defense. 

Army Corps of Engineers. 

Armed Services Board of Contract Appeals. 

Office of Dependent Schools. 

Department of Education. 

Division of Research & Improvement, Vocational Education and Rehabilita- 
tion ~ ~" " 

Department of Energy. 

Economic Regulatory Administration 
Federal Energy Regulatory Commission . 
Nuclear Waste . 

Department of Health and Human Services. 

Department of Housing and Urban Development. 



DISPUTE RESOLUTION PROCEDURES 169 

Department of Transportation. 

Urban Mass Transportation Administration . 

Office of Civil Rights. 

National Highway Traffic Safety Administration . 

Environmental Protection Agency. 

Equal Employment Opportunity Commission 

Federal Communications Commission. 

Federal Election Commission. 

Federal Labor Relations Authority. 

Hederal Maritime Commission. 

Federal Mediation and Conciliation Service. 

Federal Reserve System. 

Federal Trade Commission. 

General Accounting Office. 

Interstate Commerce Commission. 

Merit Systems Protection Board. 

National Mediation Board. 

Nuclear Regulatory Commission. 

Office of the Federal Inspector, Alaska Natural Gas Transportation System. 

Pension Benefits Guaranty Corporation. 

Postal Rate Commission. 

Railroad Retirement Board. 

Securities and Exchange Commission. 

APPENDIX II 
CASE STUDIES OF ADMINISTRATIVE ARBITRATION 

Federal Insecticide, Fungicide and Rodenticide Act. 

Pension Benefit Guaranty Corporation. . 

Commodity Futures Trading Commission Reparations Procedures 

Superfund Arbitration. 



170 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

Merit Systems Protection Board. 

Background. 

Appeals Arbitration Procedure. 
Voluntary Expedited Appeals Procedure . 
Evaluation of Appeals Arbitration. 

Implementation of the AAP. 

Timeliness and Cost- Effectiveness 

Equity and Fairness 

APPENDIX III 
AGENCY OVERSIGHT OP PRIVATE DISPUTE RESOLUTION MECHANISMJS . 

Securities and Exchange Commission Oversight of Self Regulatory Organisations 

Federal Trade Commission 

Informal Dispute Settlement Under the Magnuson- Moss Warranty Act . 
Informal Dispute Settlement Under Section 5 of the FTC Act . 



DISPUTE RESOLUTION PROCEDURES 171 



I 
INTRODUCTION 



Administrative Experimentation. 



The Administrative Procedure Act is by and large divided into two relatively 
distinct parts: notice and comment rulemaking and trial type hearings presided 
over by an administrative law judge. The provisions governing the former are, at 
least in their pristine statutory form,l remarkably brief considering the leverage 
provided agencies for controlling private action through their exercise. The latter 
are positively Byzantine in their complexity. As opposed to defining even the 
skeleton of the full range of procedures that are actually used, the two are the 
endpoints of a continuum of procedures2 ranging from the flexibility of notice and 
comment rulemaking to the formal rigidity of a trial type hearing under the 
APA. 

Perhaps unfortunately, the APA itself does not address the great bulk of 
administrative procedure that lies between its extremes, 3 other than by providing 
guidance through analogy and adaptation of the specified structures. On the 
other hand, the lack of codification encourages experimentation with new proce- 
dures to meet new needs. Moreover, because the APA itself does not address the 
requirements of the modern administrative state, Congress has taken to including 



*I would like to thank Karen Ault, Kirk Manhardt, and Jane Shinn for their 
substantial contributions to this report. 

1. The legislative history of the rulemaking provisions of the APA reveal a 
Congressional intent that far more elaborate procedures would be used for 
developing any rule with substantial impact. See, Harter, Negotiating 
Regulations; A Cure for Malaise , 71 Geo. L. J. 1, 9-10 (1982). While more 
was expected, the Act did not impose the additional procedures on agencies. 
Rather, they were simply expected to follow suit. Vermont Yankee Nuclear 
Power Corp. v. NRDC , 435 U.S. 519 (1978). Through creative statutory 
interpretation and the "management" of the administrative process, courts 
have nonetheless developed the "hybrid" rulemaking procedures to address 
the need for resolving complex factual questions well beyond customary 
agency expertise. DeLong, Informal Rulemaking and the Integration of Law 
and Policy , 65 Va. L. R. 257 (1979). 

2. Notice and. comment rulemaking is not really the lower bound of administra- 
tive procedure, of course, since it has some structure and many decisions 
are made without any specified process. Applications are reviewed and 
stamps sold with very little formality short of resolving a dispute over a 
decision made initially by a government official. 

3. In contrast with the APA, the Model State Administrative Procedure Act 
identifies three types of adjudicatory procedures to be used in appropriate 
cases: formal (§§ 4-201 to 4-221); conference (§§ 4-401 to 4-403); and 
summary (§§ 4-501 to 4-506). 

Moreover, Federal agencies actually use a broad variety of adjudicatory 
procedures for resolving contested issues. Verkuil, A Study of Informal 
Adjudication Procedures, 43 U. Chi. L. Rev. 739 (1976). Thus, while the 
APA-mandated procedures are complex, the Federal adjudicatory apparatus 
can be responsive to a host of needs. 



172 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

sometimes elaborate procedures in substantive statutes instead of relying on the 
APA to develop a coherent general administrative process.^ As a result, new 
forms of administrative procedure crop up -- through ad hoc use by agencies, 
through ad hoc statutory prescription, and through the journals. 

While the experimentation and evolution are clearly beneficial, they do have 
their costs: the new forms sometimes clash with established precepts. ^ That can, 
of course, mean either the old should adapt to the new^ or that the new is not 
living up to expectations and should be changed before further use.^ Also, 
because of their ad hoc nature, they sometimes take a considerable time to 
become accepted and hence widely used even when proven. 

We appear to be in the midst of such a process with respect to the use of 
"alternative means of dispute resolution" in the administrative process -- proce- 
dures that are not recognized by the APA but which appear to be useful supple- 
ments to the traditional administrative processes. 



Interest in Dispute Resolution. 

For at least the past decade^ and particularly the last five years, there has 
been an extraordinary interest in "alternative" ways of settling disputes -- 
alternative, that is, to the courts and formal litigation. That interest has spanned 
the gamut of disputes,^ from neighborhood justice centers^^ that work to resolve 



4. Elliott, The Pis-Integration of Administrative Law , 92 Yale L.J. 1523 (1985). 

5. Witness, for example, the consternation of the courts in the early seventies 
when directed by several statutes to review notice and comment rulemaking 
on the basis of the "substantial evidence" test normally reserved for trial 
type hearings. Industrial Union Department, AFL-CIO v. Hodgson , 499 F.2d 
467 (D.C. Cir. 1974). 

6. Courts seem fully comfortable with the notion of reviewing the factual basis 
of rulemaking more intensely -- akin to that of the substantial evidence test 
-- under the "hard look" doctrine that grew up contemporaneously if not as 
a result of the misfit statutory directions. Ass'n of Data Processing v. 
Board of Governors, 745 F.2d 677 (D.C. Cir. 1984). Both were responding to 
a perceived need to force agencies into developing the factual bases of rules 
built on highly technical or demographic data. 

7. For example, the "offeror" provision of the original Consumer Product Safety 
Act is one such failed notion that was discarded, although it may have had 
as much to do with its administration as its concept. See Harter, supra note 
1, at 60-63. 

8. The influential Pound Conference was held in 1976. It built on the growing 
interest in dispute resolution and planted it firmly in the legal agenda. 
Professor Frank E. A. Sander's paper that was delivered at the Conference 
served as an influential introduction and benchmark to the area. Sander, 
The Variety of Dispute Resolution , 70 F.R.D. Ill (1976). 

9. For a general tour of the use so far, see Goldberg, Green and Sander, 
Dispute Resolution (1985). 



DISPUTE RESOLUTION PROCEDURES 173 

pesky controversies from barking dogs and trash in alleys, to more serious social 
infractions, to major corporate matters. ^ The Chief Justice of the United States 
has been an outspoken proponent of the use of extra judicial means of resolving 
matters that would otherwise end up in the courts. 12 The Federal Rules of Civil 
Procedure were recently amended to encourage the use of a range of means short 
of actual trial for settling controversies once in the courts. ^^ 

The literature, 14 legal and otherwise, has also included a vast discussion of 
alternative means of dispute resolution, such as arbitration, factfinding, and 
mediation. While very few of these techniques are actually new, their use has 
been proliferating into areas in which they were previously unknown. We are, 
therefore, gaining insights into the use of these forms of making decisions in new 
settings. 

It is not surprising, therefore, that they have been used somewhat in the 
administrative process: Given their promise and use in the judicial setting, it is 
only logical that they may also address real needs of the administrative process. 
And, indeed, that has been the case. Some of these dispute resolution techniques 
have demonstrated their utility to administrative agencies. 1^ But, because of the 
peculiar requirements of the administrative process, in other instances the fit is 
not entirely comfortable. And, in some instances their use is likely inappropriate. 

No particular theory has developed as to what their structure should be,!^ 



10. McGillis and Mullen, Neighborhood Justice Centers (U.S. Dept. Justice 1977); 
Cook, Roehl, & Sheppard Neighborhood Justice Centers Field Test (U.S. Dept. 
Justice 1980). 

11. Green, Marks, and Olson, Settling Large Case Litigation; An Alternative 
Approach , 11 Loy. L.A. L. Rev. 493 (1978); the Center for Public Resources 
has been a major proponent of the use of means other than litigation, 
particularly the mini-trial, for resolving corporate disputes. 

12. Address by Chief Justice Burger, American Bar Association Midyear Meeting 
(Jan. 24, 1982) reprinted in Burger, Isn't There a Better Way?, 68 A. B.A.J. 
274 (1982). 

13. F.R.Civ.P 16(c). 

14. Breger, The Justice Conundrum , 28 Vill. L. Rev. 923 (1983); Sander, Mediation; 
A Select Bibliography (ABA Special Committee on Dispute Resolution 1984); 
Bingham, Vaughn, & Gleason, Environmental Conflict Resolution (Conservation 
Foundation 1980); U.S. Dept. of Justice, Nat'l Criminal Justice Research 
Service, Dispute Resolution; Techniques and Applications (1985), Alternative 
Dispute Resolution Program Evaluation ; Levin & DeSantis, Mediation; An 
Annotated Bibliography (1978). 

15. See, ACUS Recommendations 82-4 and 85-5. 

16. As will become clear. Judge Friendly's observation in the early days of 
hybrid rulemaking that "One would almost think there had been a conscious 

(continued...) 



174 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

how they should be used, how they relate to the traditional processes, what sort 
of judicial review is appropriate, and what their advantages and disadvantages are. 
The full range of ADR techniques can potentially make a significant contribution 
to administrative procedure by providing additional means of addressing needs 
within the endpoints of the procedures specified in the APA itself. Indeed, the 
adaptation and more widespread use of the ADR processes that are proving 
successful on the civil side may well offer a solution to some of the more 
pressing problems of the administrative process. That acceptance will be facilita- 
ted by familiarity with the use of the ADR processes outside of the administrative 
process; a familiarity with their use so far in it; and, some understanding of how 
they fit within the continuum and relate to other needs of the administrative 
process. 17 



This report is an initial step in that direction. 



18 



Contested Issues. 

The focus of the report is on the use of non-APA procedures that may be 
used to resolve disputed issues, as opposed to making administrative decisions in 
the first instance. These procedures may be employed directly by the agency 
itself, or they may be used by a private organization under the supervision or 
some other close relationship to an agency, generally under circumstances in 
which the agency itself would hear and resolve the issue were it not for the 
private body. The "issues" that are the subject of this report need not be 
sufficiently specific or narrow that they must be resolved in an adjudicatory 
proceeding, although certainly most will. It does mean that some potential 
disagreement has arisen that needs to be resolved. The need to resolve the 
matter is what is important from the perspective of this report, not the context 
in which the need arises. It could be as part of any form of administrative 
process -- rulemaking, adjudication, permitting, inspections, procurement, or in 
programs with an intimate connection to an agency but outside of the agency's 



16. (...continued) 

effort never to use the same phraseology twice," Associated Industries of 
New York, Inc. v. Department of Labor, 487 F.2d 342, 345 n.2 (2d Cir. 1973), 
applies with full vigor at this stage of the use of arbitration in the ad- 
ministrative process. 

17. Edelman, Institutionalizing Dispute Resolution Alternatives, 9 Jus. Sys. J. 134 
(1984); Harter, Dispute Resolution and Administrative Law; The History, 
Needs, and Future of a Complex Relationship , 29 Vill. L. Rev. 1393, 1417- 
14ia (1984). 

18. This report is a survey of the variety of techniques other than those 
mentioned in the APA itself that are used to make administrative decisions. 
It is a survey and not a comprehensive analysis. It is designed to review 
the structure of the new processes and to highlight the legal issues involved 
in their use as well as provide the basis for further use and analysis. The 
report is largely based on legal materials. In particular, very little empirical 
research has been conducted to determine how well the programs have 
functioned in practice. Before they are institutionalized on any broad basis, 
that research should clearly be done. 



DISPUTE RESOLUTION PROCEDURES 175 

direct purview. 19 The process to be employed may be more a function of the 
nature of the issue to be resolved than of the proceeding to which it is related. 20 



II 
OVERVIEW OF THE ALTERNATIVES 

The "alternative" of alternative means of dispute resolution does not 
necessarily mean "instead of something else". 21 Rather, they are different types 
of procedures that are used for making decisions, usually for resolving some sort 
of contested issue. Traditional processes, such as litigation itself, are themselves 
among the alternatives. Thus, the term alternative means of dispute resolution 
refers to the entire spectrum of techniques for resolving issues. Like other forms 
of decision making, each has its benefits and its weaknesses, and is more 
appropriately used in some situations than in others. Moreover, they are often 
used in conjunction with one another. And, like rulemaking and adjudication 
under the APA, they are more distinct conceptually than practically: they fade 
one into another. 

Although there are a number of variations on the themes, 22 the major types 
of ADR techniques are arbitration, med-arb, factfinding, mini-trial, mediation, 
facilitation, convening, conciliation, and negotiation. The list is arranged in order 
of the decreasing involvement of a third party (no matter how many parties there 
may be to the controversy), generally referred to as the "neutral. "23 



Arbitration. 

Arbitration is closely akin to adjudication in that the neutral decides the 
matter after reviewing evidence and hearing argument from the parties. It has 
been widely used for decades in labor relations and in resolving commercial 
disputes. It ranges in formality from very nearly that of a court to virtually 
without structure; the arbitrator may be called upon to apply existing law or to 
reach "justice under the circumstances." 



19. For example, the stock exchanges have procedures to resolve disputes 
concerning their members. These procedures, if not the decisions in 
individual cases, operate under the oversight of the Securities and Exchange 
Commission'. See Appendix III. 

20. See, Robinson, The Making of Administrative Policy; Another Look at 
Rulemaking and Adjudication and Administrative Procedure Reform , 11 U. Pa, 
L. Rev. 485 (1970). 

21. The reference in the text above at notes 8-9 that the interest in "alterna- 
tives" to litigation is fairly common, however. The reference, therefore, is 
somewhat ambiguous, sometimes meaning instead of litigation, and sometimes 
meaning the full range of dispute resolution techniques including litigation. 

22. See generally, Goldberg, Green, and Sander, supra note 9. 

23. While, of course, the third party is not always neutral and may sometimes 
have a very real interest in the outcome, in general the third party is 
rigorously neutral with respect to the parties and subject matter. 



176 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

The arbitration may be binding in that the arbitrator's decision ends the 
controversy, either by agreement of the parties or by some rule of law. 24 n may 
be advisory or "nonbinding" in that the parties are not bound by the decision; 
they are expected to consider it seriously, however. Many jurisdictions have 
established "court-annexed arbitration" in which certain categories of cases, 
frequently those involving less than a specified level of damages, are either 
directly referred to arbitration or the litigants are encouraged to proceed to 
arbitration before trying the case in court. Generally, a dissatisfied party is 
entitled to a trial de novo although a penalty is sometimes imposed, such as 
paying the other party's costs, if the requesting party does not better its position 
in the trial. Interest arbitration is where the neutral decides on the "ordering" 
among the parties; that is, it determines the relationship of the parties and their 
interests inter se.25 Grievance arbitration, on the other hand, is to resolve 
"rights" under existing agreements or other forms of social ordering. Last offer 
arbitration, made familiar by the baseball rules, is where the arbitrator's decision 
is limited to choosing from the last offers made by the parties. 



Med-Arb. 

"Med-arb" is, as the name itself implies, a hybrid between mediation and 
arbitration. In it, the neutral first serves as a mediator in attempting to bring 
about a settlement among the parties and then decides the issues remaining 
unresolved after the mediated negotiations. 26 Thus, following the mediation, the 
neutral becomes an arbitrator. Sometimes the arbitration is binding and resolves 
the issues, but in others the neutral prepares a report analyzing the positions and 
needs of the parties and recommends a resolution. 

Med-arb is to a degree an institutionalization of the common practice of 
judges' and arbitrators' pushing on parties for a settlement before the hearing or 



24. For a "lexicon" of ADR terms, see U.S. Department of Justice, Office of 
Legal Policy's Federal Justice Research Program, Paths to Justice: Major 
Public Policy Issues of Dispute Resolution (Report of the Ad Hoc Panel on 
Dispute Resolution and Public Policy prepared by the National Institute for 
Dispute Resolution) (1984) at 36. 

25. Perritt, "And the Whole Earth was of One Language" -- A Broad View of 
Dispute Resolution , 29 Vill. L. Rev. 1221, 1229 (1983-4). 

Perhaps an "interest" dispute is best characterized by an example. Professor 
Perritt cites one provided by Dean Hazard: 

It is the type of dispute one gets into say, with one's friend, 
when you ask: Shall we go to the game or shall we stay at 
home and watch television? This kind of dispute requires a 
settlement procedure of some kind, but it is not the kind of 
dispute that is [suited for the courts]. 

26. For an example of a med-arb involving a dispute over how much various 
local jurisdictions should pay for a regional sewage disposal plant, see 
Susskind, Court Appointed Masters as Mediators, 1 Negotiation J. 295 (1985). 



DISPUTE RESOLUTION PROCEDURES 177 

after the hearing but before the decision. 27 jn that case, however, the mediation 
is an adjunct of the main task of judging, and it clearly carries the stick of 
coercion, whereas in med-arb as usually referred to the emphasis is on the 
mediation with the arbitration being used as the secondary process. 

Unless the parties themselves ask the neutral to render a decision after an 
impasse is reached, the process is controversial among mediators. The two 
processes rely on different cultures and different relationships between the 
neutral and the parties. Mediation requires an exploration of what the parties 
actually need and are willing to settle for whereas arbitration remains adversarial 
so that a party may be reluctant to reveal what is acceptable for fear that it 
would be cut down further in the decision. 28 Oftentimes, especially in labor 
cases, however, the parties will desire the resolution of the controversy and ask 
the mediator to arbitrate the remaining issues. In fact, in instances in which 
some resolution is important so the parties agree before negotiations begin to 
some sort of med-arb process, the fact that the issues will be arbitrated if no 
agreement is reached serves as a deadline and powerful incentive for the parties 
themselves to reach a decision so that the "arb" part of the process often remains 
unused. 29 



Factfinding. 

Many controversies, particularly those that must be resolved by regulatory 
agencies, turn on enormously complex factual issues. They may be of the 
highest-tech -- "on the frontiers of scientific knowledge" as the courts have 
said'^0 -- or require predictions of difficult economic developments, or the 
compilation of demographic issues, or the facts cf an industrial dispute. In these 
cases, the policy or ultimate judgment on the matter cannot be decided until the 
facts are developed in a relatively authoritative way. Once they are, the parties 
may then negotiate a settlement, further proceedings may be held, more research 
may be needed, or the facts may sufficiently drive the outcome so that very little 
will remain to be done since, for practical purposes, the issue has been resolved. 



27. Fuller, Collective Bargaining and the Arbitrator, excerpted in Goldberg, 
Green, and Sander, supra note 9, at 247. 

The Merit Systems Protection Board has established this procedure. See, 
text at note 595. 

28. "The consensus among mediators appears to confirm that the trust and 
candor required in mediation are unlikely to exist if the participants know 
the mediator may be formulating an opinion or recommendation that will be 
communicated to a judge or tribunal." Folberg and Taylor, Mediation at 277. 

29. Med-arb as a dispute settling technique works, and works well. We have 
been involved in med-arb in such diverse fields as nursing, newspapers, 
longshore, public utilities, saloons, teamsters, and teachers, as well as in 
commercial disputes. Of the literally hundreds of issues involved in such 
cases, less than a dozen had to be finally arbitrated by the med-arbitrator. 
The parties, with his aid, successfully negotiated all the rest. Kagel, 
Comment, excerpted in Goldberg, Green, and Sander, supra note 9, at 264, 265-6. 

30. Industrial Union Dept., AFL-CIO v. Hodgson, 499 F.2d 467, 474 (D.C. Cir. 1974). 



178 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

A "factfinding" proceeding may be appropriate for these issues. Such a 
proceeding generally entails the appointment of a person or group of people with 
technical expertise in the subject matter to assay the situation and prepare a 
report establishing the "facts" of the question entrusted. The factfinder is not 
asked to resolve the entire issue, only to establish the underlying facts. The 
matter itself will be determined in another forum -- either by the parties or in 
some other proceeding. The procedures used for making the determination range 
from the highly informal to close to a trial. ^^ 

The factfinder in labor disputes may be someone with familiarity of the 
industry but certainly someone familiar with labor relations generally; it may also 
be someone who is widely respected by both sides, so the report will be given 
credence beyond the purely factual -- objectively determinable — issues. Factfind- 
ing proceedings are, of course, commonly used by administrative agencies, 
although they frequently are in the form of advisory committees. 32 



Minitrial. 

A "minitrial" generally follows the exchange of the parties' key documents 
and other factual materials. 33 jn the minitrial itself, the lawyers for each party 
are given a relatively short period -- ranging from several hours to several days 
-- to make their best case. They will sometimes call witnesses but generally they 
argue what the evidence that has been developed shows and the legal conclusions 
that would flow from the issues presented. These presentations are made to 
representatives of the parties who have the authority to settle the controversy 
and a neutral third party. 34 When the arguments are concluded the representa- 
tives then meet to negotiate an agreement. 

The process is designed so the executives can view their own case in 
perspective -- its strengths and weaknesses against those of the other party. The 
neutral may be called upon to render his or her opinion as to how a court or 
jury would decide if the matter were submitted for a court's decision; the parties 
may also ask the neutral for more limited advice. The neutral is, therefore, more 
an "agent of reality" than an arbitrator. As such, his or her report would 
potentially change the bargaining position of the parties, and hence they may 



31. For an example of a relatively formal proceeding, see Shapiro, Scientific 
Issues and the Function of Hearing Procedures; An Evaluation of FDA's 
Public Board of Inquiry , Report to the Administrative Conference of the 
United States (1985). 

32. See, e.g. Chronic Hazards Advisory Panel, 15 U.S.C. § 2078; Air Quality 
Advisory Board and Advisory Committees, Sec. 117, Clean Air Act; Federal 
Insecticide, Fungicide and Rodenticide Act, 7 USC § 136d(a); the Food and 
Drug Administration has used panels of the National Academy of Scien- 
ces/National Research Council to review the efficacy of drugs, see Stewart, 
Regulation, Innovation, and Administrative Law; A Conceptual Framework , 
69 Cal. L. Rev. 1256, 1354-1359 (1981). 

33. For a discussion of mini-trials in general, see Green, Marks, and Olson, 
supra, note 11, 

34. A neutral third party is not always used, however. The NASA minitrial did 
not, for example. See text at note 345. 



DISPUTE RESOLUTION PROCEDURES 179 

have an incentive to settle before the report is issued. Or, the report may also 
convince a party that its case is not as strong as originally thought and hence 
that a settlement may be the advisable route. The function of the minitrial is to 
convert what could be a complex, protracted legal battle into a business decision 
to be made by the executives of the parties. 

Mediation. 

A mediator is a neutral third party who assists the parties in negotiating an 
agreement. Mediation is simply a negotiation involving a mediator. The mediator 
has no independent authority and does not render a decision. Any decision that 
is made is made by the parties themselves. As one mediator with diverse 
experience has said, "People pay attention to the mediator for the same reason 
they do to a civilian directing traffic around an accident -- it helps the process." 

The mediator may be quite active in that endeavor, however. He or she will 
usually help the parties frame the issues, analyze what their actual needs are, and 
what the other side needs; an important part of that process is also deflating 
more ambitious assertions and desires when there is little chance of their being 
achieved. He or she will likely offer suggestions for possible ways of settling the 
issues and draft materials for the consideration of the negotiations. Some of the 
suggestions for those ideas may, of course, come from the parties themselves but 
they will be communicated in a way that will not lock a party into an idea that 
does not fly; in Washington-speak, the mediator provides the parties with the 
basis for a "plausible denial". The mediator may also need to communicate to the 
parties what is likely to happen if an agreement is not reached. ^^ In the 
current vernacular, the mediator will help the parties define their "BATNA's".^^ 

The mediator may meet privately with the parties and shuttle back and 
forth. This is frequently helpful in bounding the issues sufficiently that the 
parties can address them directly in a meeting. Without that prior definition, the 
parties may find the risk of direct discussion too great from a political standpoint 
within their constituencies. Moreover, the shuttling can save valuable time by 
reducing the need for more direct, face-to-face meetings which are always 
difficult to schedule among senior representatives. The mediator can deflect 
attention from the negotiators by being the spokesperson to those not engaged in 
the discussions. Importantly, the mediator also serves as the proponent of the 
process itself and can help keep discussions on track and moving. 

FaciUtating. 

A facilitator also works "to help a group of individuals or parties with 



35. A relatively common example in public disputes is that one side may 
ultimately win the issue, but the other will be successful in delaying it. 
That state of affairs may not be satisfactory to either side so both may wish 
to resolve their differences through agreement. 

As a result, it is sometimes said that one of a mediator's functions is to 
carry threats back and forth among the parties, 

36. BATNA stands for best alternative to a negotiated agreement. The term is 
from Fisher and Ury, Getting to Yes. 



180 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

divergent views reach a goal or complete a task to the mutual satisfaction of the 
participants."'^'^ The terms "facilitator" and "mediator" are often used interchan- 
geably. Although the two are close in meaning, they are distinct. A facilitator 
generally runs meetings and coordinates the negotiations during a meeting but 
does not become as involved in the substantive issues as does a mediator when 
working with the parties. ^^ Thus, a mediator is also a facilitator but not the 
other way around. 



Convening. 

A "convenor" is a neutral who helps identify those who are interested in and 
affected by a particular issue and indeed what the issues in controversy are. 39 
Thus, the convenor's first task is to conduct a "feasibility analysis" or "conflict 
assessment" as to whether direct negotiations among the parties would be a 
recommended way to resolve the issues. If they would, the convenor brings the 
parties together to negotiate or otherwise reach some sort of decision. The 
convenor's task ends when the parties are assembled, although of course the same 
person will frequently then serve as the mediator or facilitator. "^0 



Conciliation. 

A conciliator works to lower tensions, improve communications, and defuse a 
tense situation. "Conciliation is frequently used in volatile conflicts and in 
disputes where the parties are unable, unwilling, or unprepared to come to the 
table to negotiate their differences."^! 



Negotiation. 

Negotiation is simply -- nothing more nor less -- communication between 
people in an effort to reach an agreement. Negotiations clearly happen all the 
time. As the introduction to the section on negotiation of a leading book says, 
"We negotiate with our friends about where to eat dinner, with our spouses about 
who will do the household chores, with our children about what time they will go 



37. Paths to Justice , supra note 24, at 37. 

38. Since it is often confused, it bears repeating that a mediator is not an 
arbitrator and does not decide substantive issues. Rather, the mediator's 
substantive involvement is through exploring the issues with the parties in 
an effort to illuminate potential avenues for agreement. 

39. See, ACUS Recommendation 82-4, Paragraphs 3-5; Harter, Negotiating 
Regulations , supra note 1, at 67-82. 

40. The convenor will have developed an understanding of the issues and a trust 
among the parties, and hence it is usually far easier to use the same person 
as the convenor and mediator or facilitator. Harter, supra note 1 at 77-79. 



41. Paths to Justice, supra note 24, at 36-37. 



DISPUTE RESOLUTION PROCEDURES 181 

to bed. "42 y^Q also negotiate settlements to controversies large and small. 
Indeed, we negotiate agreements of all sorts. 

Sometimes the term "negotiation" carries a perverse connotation, one of 
"selling out" or compromising one's integrity. It certainly does not necessarily 
mean horse trading, log rolling, nor other unpleasant images that conjure up 
parties' exercising raw power or making inappropriate compromises. The nego- 
tiations may be totally principled and based on the substantive evidence. The 
scientific process of peer review is a form of negotiation in which the various 
"parties" analyze the situation, raise issues, and attempt to reach a decision on a 
matter. 

Negotiation is such a pervasive means of "dispute resolution" that it is 
sometimes overlooked as such. Since the vast majority of cases'*^ and issues are 
settled, it is the lifeblood of the administrative process. Many of the procedures 
developed by agencies to "resolve disputes" are actually ways to further and 
stimulate negotiated settlements. 



Ill 
ADMINISTRATIVE ARBITRATION 

Arbitration is a powerful, widely used dispute resolution technique. For 
example, the American Arbitration Association has over 60,000 arbitrators on its 
rosters'*'* and more than 45,000 matters are referred to it annually for resolu- 
tion. ^^ Its use has been endorsed and supported by the U.S. Arbitration Act^^ 
which directs courts to enforce arbitration agreements and their resulting awards. 
The Uniform Arbitration Act, which forms the basis for legislation in more than 
half the states, establishes a similar provision for state law. Court annexed 
arbitration is growing in popularity and currently at least 16 states employ some 
sort of arbitration program as an adjunct to the courts.'*^ 

Because arbitration results in a decision that is imposed on the parties, its 
use is particularly appropriate for resolving "distributional" disputes in which a 
better bargain for one party means less for the other. ^^ Reaching an agreement 
through direct negotiation is particularly difficult in those situations. Arbitration 
frequently serves as a stimulus to settle, however, since parties are forced to 
prepare their cases for presentation to the arbitrator, and they will also have to 
discount the potential of an adverse decision. Hence, like preparing for trial, the 



42. Goldberg, Green, and Sander, supra note 9, at 19. 

43. Galanter, Reading the Landscape of Disputes; What We Know and Don't 
Know (and Think We Know) About our Allegedly Contentious and Litigious 
Society ,^31 UCLA L. Rev. 4 (1983). 

44. Telephone interview with Irene Conway, American Arbitration Association. 

45. Telephone interview with Earl Baderschneider, American Arbitration Association. 

46. 9 U.S.C. § 1 et seq. 

47. Dispute Resolution Forum (Aug. 1985) at 2. 

48. Schelling, The Strategy of Conflict, (1960) at 21. 



182 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

potential of an arbitral award will Itself change the parties' BATNA. Similarly, 
the parties can agree to submit their dispute to arbitration but not be bound by 
the arbitrator's decision. In that case, the award will serve as the basis for 
further negotiation. 



Voluntary versus Mandatory. 

There are essentially three types of arbitration and, since the relationship 
between the parties and the process itself may vary one from another, it is 
important to keep the distinctions in mind. 

The first two types are voluntary, in which the parties agree to submit the 
dispute to arbitration. In the first, the agreement is made before any dispute 
arises. The agreement will typically be made in a contract which provides that 
any dispute arising under it will be submitted to arbitration. The provisions of 
the arbitration may then be set out. The second form is where the parties agree 
to submit a dispute that has arisen to arbitration instead of using some other 
process, such as litigation, for resolving it.^^ Although the two are different for 
some purposes, for the most part they are similar in their effect on the nature of 
the arbitration process. One major difference, however, is that a party that 
entered into a pre-dispute agreement to arbitration may change its mind once the 
dispute arises and seek to use some other process once confronted with the actual 
prospect of an arbitration. ^0 Under such a situation, the parties may not be fully 
cooperative with each other in designing a system, and the coercion of the courts 
in enforcing an agreement to arbitrate may be needed. 

The third type is where the process is imposed on the parties: it is the 
only forum available for resolving the matter, at least in the first instance. 
Mandatory court annexed arbitration is such an example. In these cases, the 
parties are generally not as free, if indeed at all, to define the process that will 
be used. 



Nature of Arbitration. 

Arbitration has no set, definite process, and indeed that is one of its main 
attractions. It is an inherently flexible procedure. Common threads run through 
most arbitration programs in the private sector, however: 

Private Neutral. A private individual serves as the arbitrator. That is, the 
arbitrator generally does not serve in any official, governmental role, although 



49. There is a perception among some who are familiar with corporate dispute 
resolution that the vast majority of arbitrations are pursuant to pre-dispute 
agreements. Parties appear to be much more reluctant to submit an existing 
dispute to arbitration, but rather tend to favor litigation instead. Testimony 
of Michael F. Hollering, General Counsel of American Arbitration, at ACUS 
Hearings on Agency Use of Alternative Dispute Resolution by Administrative 
Agencies, May 2, 1986. Conversation with Jonathan Marks, President, EnDls- 
pute, Inc. 

50. See, e.g., Mitsubishi Motors Corp. v. Soler Chrysler- Plymouth , 105 S.Ct. 3346 
(1985); Hergel and Salpeter, Alternative Dispute Resolution May Have Limits, 
Legal Times (Dec. 23/30 1985) at 9. 



DISPUTE RESOLUTION PROCEDURES 183 

there is nothing to prevent the arbitrator from being a government official absent 
any conflict of interest. 

Parties Choose Arbitrator. The parties are usually able to select the 
arbitrator. This enables them to choose someone in whom they have confidence. 
In some instances it is important that they can select someone who has technical 
expertise in the subject matter of the dispute. That enables the parties to get 
right to the merits of the dispute, as opposed to having to educate a generalist 
judge with sufficient background so the matter can be put in perspective. It also 
enables the arbitrator to exercise a professional judgment based on experience and 
technical insight instead of solely on a "record" generated by the parties. 

The parties themselves may identify an appropriate person or may select 
from a list tendered to them by an organization such as the American Arbitration 
Association. That choice may result from the parties' ranking those on the list 
and the person with the highest rank being selected, or each party may be 
permitted to strike a name, so that anyone not stricken could serve. If the 
parties are not permitted to choose, as is customary in the court annexed 
arbitration programs, a panel of three arbitrators often serves and a decision is 
made by majority vote. The arbitration in such programs is customarily nonbind- 
ing. 

Parties Can Select the Norm. The parties can decide what standard the 
arbitrator will apply. It may be the law of a particular jurisdiction, the rules of 
some organization, or the ethos of the milieu in which the dispute arose. The 
norm may also be, and frequently is, the arbitrator's "own brand of justice. "^1 If 
the arbitration program is imposed on the parties, the arbitrator will customarily 
apply the prevailing law or other established norm of the organization imposing 
the requirement. 

Flexible Procedure . Since arbitration is a private dispute resolution process, 
the parties themselves can design its procedures. They can range from a virtually 
total emulation of a court process to the most informal and ad hoc. In some 
instances, full discovery is permitted and enforced on pain of default. In other 
cases major documents or other evidence on which a party will rely, are ex- 
changed prior to hearing and in others nothing happens before the hearing. 
Organizations such as the AAA and the National Academy of Conciliators publish 
rules that are designed to govern the arbitration proceedings in particular sub- 
stantive areas;52 they can serve as the "default" rules that will apply unless 
modified by agreement of the parties. Because it is not a public process, the 
proceedings and the result can be kept private and confidential. 

The common denominator in the process is that, unless they settle, ^^ t^g 



51. Jones, His Own Brand of Industrial Justice; The Stalking Horse of Judicial 
Review~of Labor Arbitration , 30 UCLA L. Rev. 881 (1983). 

52. See, PBGC, FIFRA in App. II. 

53. It appears from preliminary research that many fewer cases that are 
submitted to arbitration settle as compared to those that go to trial. 
Whereas many do settle on the eve of the hearing, perhaps only half as 
many do so as are settled prior to a trial. This is perhaps surprising, and 
certainly something that needs to be borne in mind when considering 
institutionalizing arbitration on a broad scale. 



184 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

parties submit evidence and argument to the arbitrator who makes the decision. 
As a result of the flexible procedure and the fact that the parties can select the 
arbitrator, the process can be conducted quite expeditiously should they wish, in 
terms of the time from when the dispute arises to the hearing, the length of the 
hearing itself, and the time from the close of the hearing to the decision. The 
parties can determine the trade off between the formality they desire and the 
need for expedition. 

While certainly one of the hallmarks and putative benefits of arbitration is 
Its reduced transactions cost in terms of time and resources, that is not always 
the case. In some instances the arbitration will look for all the world precisely 
like a trial with a full complement of discovery, sworn witnesses, briefs, and so 
on. 5"* Even then, the process may still be more expeditious than a court since 
presumably the hearing can be scheduled more rapidly than a judicial calendar 
would usually permit. But, before embracing arbitration as a means for resolving 
a dispute the nature of the arbitration process that is contemplated must also be 
considered to ensure that the desired benefits will actually materialize. 

Award. Typically, the decision in an arbitration is only an award: a final 
result, without elaboration on the facts found or the resolution of the individual 
issues presented. 5^ Sometimes, of course, the decision is supported by a brief 
recitation of the facts and conclusions. 

Finality. One of the primary benefits attributed to traditional arbitration is 
its finality. Once an award is made it may be subjected to only limited additional 
review, in court or otherwise. ^^ As one leading commentator has said: 



54. Letter of April 25, 1986 from Chief Administrative Law Judge Naham Litt to 
Charles Pou; testimony of Stanley Johnson at ACUS hearings, supra note 49. 

55. Goldberg, A Lawyer's Guide to Commercial Arbitration (1979) at 62, 66. 

56. The provision of the U.S. Arbitration Act pertaining to judicial review is 
extremely limited: 

In either of the following cases the United States court in and for the 
district wherein the award was made may make an order vacating the award 
upon the application of any party to the arbitration -- 

(a) Where the award was procured by corruption, fraud, or 
undue means. 

(b) Where there was evident partiality or corruption in the 
arbitrators, or either of them. 

(c) Where the arbitrators were guilty of misconduct in refusing to 
postpone the hearing, upon sufficient cause shown, or in refusing 
to hear evidence pertinent and material to the controversy; or of 
any other misbehavior by which the rights of any party have been 
prejudiced. 

(d) Where the arbitrators exceeded their powers, or so imperfectly 
executed them that a mutual, final, and definite award upon the 
subject matter submitted was not made. 

(continued...) 



DISPUTE RESOLUTION PROCEDURES 185 

The essence of the law of arbitration is that the scope of judicial 
review of arbitration awards is very limited. When the arbitrators are 
properly selected, conduct an orderly hearing at which all parties have 
a fair chance to present their proofs and render an intelligible award 
within the scope of their authority, the courts will confirm and enforce 
the award. ^"^ 

Or, as another explained: 

The courts will not review the merits of the award and confirmation 
will not be denied, nor will vacatur be granted, upon a showing of 
error of law or fact on the part of the arbitrators. The court's inquiry 
is confined to determining whether the award falls within the authority 
of the arbitrators, whether in form it reflects the honest decision of 
the arbitrators and whether the hearing generally comported with 
accepted standards of due process. ^^ 

The relationship between courts and arbitration is itself a bit complex and 
evolving, ^9 but its essence is that it is very limited. 

Quality Control. The quality control in arbitration -- the reason people use 
it and have confidence in it -- is the ability to choose the arbitrator and the 
minimal rules under which the process operates. They obtain in return, an 
expeditious decision^^ that is within the bounds of acceptability. 

But, it is likely that the arbitration proceeding will be more abbreviated 
than a trial and that some of the judicial procedures designed to ensure ac- 



56. (...continued) 

(e) Where an award is vacated and the time within which the 
agreement required the award to be made has not expired the 
court may, in its discretion, direct a rehearing by the arbitrators. 

9 U.S.C. §10. 

57. Goldberg, A Lawyers Guide to Arbitration (2d Ed. ALI 1983) p. 61. 

58. Kreindler, Arbitration Practice Under Federal Law , 18 Forum 348, 357 (1983). 
And see, 9 UiS.C. § 10, 11. 

59. Mitsubishi Motors Corp. v. Soler Chrysler- Plymouth Inc . 105 S. Ct. 3346 
(1985); AT&T Technologies, Inc. v. Communication Workers of America , 106 
S. Ct. 1415 (1986); Dean Witter Reynolds Inc. v. Byrd , 105 S. Ct. 1238 (1985). 

60. The often cited major advantages of arbitration is its expedition and its 
finality -- it is a means of quickly resolving the dispute within the bounds 
of acceptability. Statement of Kay McMurray, Director, Federal Mediation 
and Conciliation Service, and Michael F. Hollering, General Counsel of 
American Arbitration Association at ACUS Hearings, supra note 49. Thus, if 
the procedures of an arbitration are unduly complex or if subjected to 
searching review, its primary value is lost and, absent other needs the 
matter would likely be better resolved in a full trial. 



186 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

curacyfil will not be used. It is, therefore, perhaps inappropriate to expect that 
arbitration and trials would reach the same result in every case. In some 
instances arbitration may be viewed as the more accurate because of its flexible 
nature and its ability to draw on technical expertise. In other instances, the 
quality control procedures of the courts would be expected to reach a more 
"accurate" resolution. The question then becomes how much of a spread between 
the two is acceptable and at what cost.^2 

Benefits/Uses. To summarize and extend, arbitration is a particularly 
attractive means of dispute resolution when one or more of the following factors 
are present: 



.63 



• Time or transactions costs are more important than the "accuracy" of 
any one decision. ^^^ 

• No decision is of critical importance to any party. ^^ 

• Technical expertise is important for the decision maker. 

• The parties want to choose the basis of the decision, especially if it is 
to be different from the law that would be applied in a judicial 
proceeding. 

• The parties desire privacy. 

Drawbacks. Arbitration is generally not particularly suited where: 



61. E.g. enforced discovery; findings of fact and conclusions of law; subpoena of 
witnesses; appeals. 

62. Many people clearly have a knee jerk reaction to arbitration as simply a 
sophisticated way to "split the difference" between the parties. That is, 
these people seem to feel impulsively that the arbitrator will not make an 
honest effort to apply the designated norms to the facts. Similar allegations 
can, and frequently are, much of virtually any decisional process. It seems a 
particularly unfortunate bias with respect to arbitration, however. In the 
abstract, if the parties are careful in selecting the arbitrator, the problem 
should not arise. More empirically, however, parties familiar with arbitration 
generally find it a satisfying way of resolving disputes with integrity. 

63. Paths to Justice , supra note 24, at 34; Goldberg, Green, and Sanders, supra 
note 9, at 8-9. 

64. For example, in a commercial or construction dispute, it may be more 
important to reach some decision than ensuring that it is "accurate" in the 
sense of emulating the decision a court would reach. That is necessary so 
the parties can get on with business based on the decision. 

65. Arbitration is frequently used where many claims need to be resolved 
expeditiously, no one of which is of fundamental importance to the parties. 
The parties may in fact integrate a large number of individual claims. For 
example, a labor union and a company will be parties to an arbitration 
agreement to resolve a variety of separate disputes. Whatever the variation 
of the award, "on the average" they would not only be acceptable but 
preferable to a more intensive form of resolution. 



DISPUTE RESOLUTION PROCEDURES 187 

• Uniform results are desired -- reaching similar results in similar cases. 

• The development of a "common law" or significant policy that will 
govern future decisions is important. 

• Maintaining established norms or policies is important;66 in these cases 
it is decided that the public policy expressed in established law 
outweighs the ability of the parties to alter it by selecting the norms 
or even the forum where the law will be applied."' 

• Public scrutiny of the process and the result is desired. 

• Strict "quality control" is important and cannot be supplied by providing 
for the technical expertise of the arbiter. 

• The matter affects some who are not parties so that they will lack the 
ability to protect their interests in the outcome. 

Administrative Arbitration 

The putative benefits of arbitration are attractive indeed. Interestingly, some 
of the major reasons for the establishment of administrative programs and 
administrative, as opposed to judicial, adjudication was to tap many of these same 
virtues. For example, one early case, which exhibited a residual concern and 
discomfort with agencies, characterized their benefits: 

[T]he obvious purpose of the legislation [is] to furnish a 
prompt, continuous, expert and inexpensive method for 
dealing with a class of questions of fact which are peculiarly 
suited to examination and determination by an administrative 
agency specially assigned to that task. The object is to 
secure ... an immediate investigation and a sound practical 
judgment, and the efficacy of the plan depends upon the 
finality of the determinations of fact with respect to the 
circumstances, nature, extent, and consequences of the 
[issues presented]. ^^ 

The benefits of administrative decisions have been described more recently 



66. Wilco V. Sw'ann , 346 U.S. 427 (1953); Alexander v. Gardener- Denver Co., 415 
U.S. 36 (1974) (Title VII claims should be heard de novo in Federal Court 
even after they have been heard in a grievance arbitration). Katsoris, The 
Arbitration of a Public Securities Dispute , 53 Fordham L. Rev. 279 (1984); 
Edwards, Alternative Dispute Resolution; Panacea or Anathema? , 99 Harv. L. 
Rev. 668 (1986); Fiss, Against Settlement, 93 Yale L. J. 1073 (1984); Schoen- 
brod. Limits and Dangers of Environmental Mediation; A Review Essay , 58 
N.Y.U.L.Rev. 1453 (1983). 

67. Paths to Justice , supra note 24, at 34. 

68. Crowell v. Benson, 285 U.S. 22 (1932). 



188 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

as avoiding judicial delays, application of expertise, and their efficiency. ^9 Thus, 
the reasons giving rise to the current interest In arbitration and other forms of 
dispute resolution are a resounding echo of the very basis for the establishment 
of administrative agencies. But now agencies themselves face crushing case- 
loads^O and are themselves accused of exhibiting problems similar to those of the 
courts for which they were to be the cure.'l It is surely not surprising, 
therefore, that agencies, ^2 Congress, ^3 g^d private organizations^'* are anxious to 
find new ways to address the difficulties. Since the non-judicial forms of dispute 
resolution frequently fulfill the promise, their use in or adaptation to the 
administrative process is to be encouraged. 

Dispute resolution techniques can provide an entirely new range of tools for 
making administrative decisions or even alleviating the need for governmental 
decisions. ^^ Thus, for example, they could take the burden off an overworked 
adjudicatory process and provide better "justice" at the same time. They can also 
provide a means of participation far better than that supplied by the APA itself, 
even under judicial gloss adding requirements. 

Some problems that are addressed through command and control regulation 
can also be better addressed by establishing a dispute resolution mechanism to 
resolve individual disagreements in a far more personal, factual based means than 



69. Administrative agencies are both efficient and speedy; and ... [a]gencles 
provide modern government with the informality of action and decision 
making usually found in large private business enterprises. Mezlnes, Stein, 
and Gruff, Administrative Law (1983) at 1-13. 

70. For example, 20,000 cases were referred to the 27 Federal agencies that 
employed at least one full-time administrative law judge In 1978. An 
additional 196,428 cases were referred to the Social Security Administration 
during the same year. Administrative Conference of the United States 
Statistical Report for 1976-1978 of Federal Administrative Law Judge 
Hearings, (1980) at 33. 

71. For example, the average time from complaint to disposition of a black lung 
case was nearly 1-1/2 years In the period 1976-78; it was more than 2 years 
for Service Contracts Act cases; more than 4 years for a Maritime Ad- 
ministration case; 2 years for Investment Company Act cases. ACUS, Federal 
Administrative Law Judge Hearings (1980). To be sure, arbitration would not 
be appropriate for some of these cases, but the point Is that delay, com- 
plexity, and mounds of paper have surrounded administrative trials. 

72. CFTC, MSPB 

73. Super^ind, PBGC, FIFRA, MSPB. 

74. The arbitration provisions of FIFRA were enacted at the behest of private 
organizations apparently seeking an expeditious resolution of a disagreement 
over payment for the use of data used to register a pesticide. See text 
accompanying note 409. 

75. Just as one need not find fault with a hammer to advocate Including a 
screwdriver and pliers In a tool kit, one need not dwell on the failures of 
trials to advocate the adoption of ADR techniques. Rather, the techniques 
are alternative means of making decisions that are better suited in some circumstances. 



DISPUTE RESOLUTION PROCEDURES 189 

could result from a generally applicable requirement that may as a practical 
matter leave the individual in the same situation as before a rule was promul- 
gated. ^^ The agency may be in a favorable position to supervise the minimal 
requirements of the dispute resolution mechanism instead of issuing and then 
policing a regulation. That process may work to the benefit of all concerned. 



Varieties of Administrative Arbitration 

The discussion that follows is based predominately on the case studies of 
administrative arbitration that are contained in Appendix II. The arbitration 
programs that were studied are those of the Federal Insecticide, Fungicide and 
Rodenticide Act (FIFRA);^"^ the Multiemployer Pension Plan Amendments Act of 
1980^^ that is administered by the Pension Benefit Guaranty Corporation (PBGC): 
the reparations procedures of the Commodity Futures Trading Commission'''^ 
(CFTC); the Comprehensive Environmental Response, Compensation and Liability 
Act^^ (Superfund); and the two programs of the Merit Systems Protection 
Board. ^1 While certain patterns through several of the programs, no two are just 
alike. Together, they span virtually the full range of possible characteristics of 
arbitration programs. Their attributes are summarized in the accompanying table, 
and the details are available in Appendix II. 



76. For an elaboration on this theme of the relationship between dispute 
resolution mechanisms (DRM) and regulation, see Harter, Dispute Resolution 
and Administrative Law; The History, Needs and Future of a Complex 
Relationship , 29 Vill. L. Rev. 1393, 1395-1400 (1984). 

77. 7 U.S.C. § 136 et seq. 

78. 29 U.S.C. § 1381 et seq. 

79. 7 U.S.C. § 18(b). 

80. 42 U.S.C. § 9601 et seq. 

81. 5 U.S.C. §§ 1101-8911. 



190 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

TABULAR SIBMART OF VARIETIES OF ABMI N I STRATI VE ARBITRATION 



CHARACTERISTIC 



PIPIA 



PBGC 



CFTC 



SUPERF 



MSPB/ 
AAF 



MSPB/ 
VEAP 



Created by rule 


Stat : 


Stat : 


Rule 


Stat : 


Rule/ : 


Rule/ : 


or statute 










stat 


stat : 


Use: voluntary or 


Man 


Man 


Vol 


Vol for : 


Vol. 


Vol. : 


mandatory 








pri.; : 


J 






J 


1 




man for : 


] 


: 










gov • t : 


: : 


Arbitrator: agency 


Priv 


Priv 


Agency 


Priv fr. 


Agency 


Agency : 


or private 








agency 
list 






Arbitrator: app' ted 


Choose 


Choose 


App't 


Choose 


App't 


! App't : 


or parties choose 
















None 


Ex i s t i ng 


Same as 


Rule 


Same 


rSame : 


agency rule; stat; 




law 


formal 




as 


:as : 


none specified 










formal 


: formal : 


Proceeding: 


: For 


For 


Inf 


: For 


:Inf 


:Inf : 


formal ; informal 














Record: full w/ tr. 


: Vol 


: Vol 


: Docs 


: Full 


:Vol 


:Vol : 


limited; or full if 










: 




requested (vol). 




! 


: 


: 


; 


: : 


Decision: findings 


: FF/CL 


• Fact/ 


Award; 


: Full 


:Sinniary 


:SiJiTnary : 


of fact; conclus- 




: legal 


brief 




:of 


:of : 


ions of law; award 




: basis 


dis. , 




: FF/CL 


: FF/CL : 


only; full opinion 






: no find. 








Agency Review: full 


: None 


: None 


: Limited 


: None 


:Limlted 


:Full : 


limited; none 














Court Review: lim- 


: Limited, 


Unclear : 


None : 


: Arb & 


:Arb & 


:Arb & : 


ited or arbitrary & 


: but 


: arb & 


"waived" 


: cap 


reap 


:cap : 


capricious standard 


: Tucker 
: Act act. 


: cap or 
limited 











DISPUTE RESOLUTION PROCEDURES 191 

IV 
THE LEGAL ISSUES OF ADMINISTRATIVE ARBITRATION 

Some limitations on the administrative use of arbitration need to be borne in 
mind when considering its use. Some of the problems are conceptual, 82 some are 
statutory,83 and some are constitutional. 84 Some are practicah^S arbitration may 
be an inappropriate tool to address the issues presented. Its benefits and 
drawbacks need to be considered when developing a program, and it should not be 
too quickly embraced without analyzing its utility in dealing with the specific 
matters to be resolved. With only a few exceptions, most of the obstacles can be 
overcome. Properly used, arbitration offers the administrative process the same 
promise it has provided for resolving private sector questions. 

Statutory Limitations when the Government is a Party. 

The Comptroller General has on several occasions, interpreted an obscure 
statutory provision with seemingly no relevance whatever^B to prohibit agency use 
of arbitration in the absence of specific authorization. This section, enacted in 
1909,8*^ bars the use of public money for "the pay or expenses of a commission, 
council, board, or similar group, or a member of that group" unless that commis- 
sion or board is "authorized by law." The Comptroller General has consistently 
found this prohibition applicable to arbitration panels established to determine the 
rights of the United States. The Comptroller General has also viewed Congress's 
express authorization of agency use of arbitration to indicate that agencies lack 
authority to submit disputes to arbitration in the absence of such authorization. 

The Attorney General reviewed the legislative history of this prohibition on 
the use of funds to pay unauthorized commissions soon after its enactment. The 
Attorney General described the breadth of this prohibition when considering the 
Secretary of War's appointment of a committee of architects to assist in over- 
seeing the development of the landscape surrounding Niagara Falls. The statute 
ascribing this duty to the Secretary did not expressly authorize such a commit- 
tee. Nevertheless, the Attorney General approved appointment of this committee, 
arguing that "public officers have not only the power expressly conferred upon 
them by law, but also possess, by necessary implication, such powers as are requi- 
site to enable them to discharge the duties devolved upon them. "88 The 
Attorney General determined that the prohibition on paying for unauthorized 
commissions was not intended to affect this implied authority. The legislative 
history shows that the bill as originally introduced would have prohibited all 
payments to all. commissions or boards not "in specific terms authorized by 



82. See text at note 140. 

83. See text at note 86 et seq. 

84. See text at note 106 et seq. 

85. See text at note 66. 

86. 31 U.S.C. §1346. 

87. Mar. 4, 1909, Ch. 299 § 9, 35 Stat. §1027. 

88. 27 Op. Atty. Gen 432, 436 (June 26, 1909). 



192 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

Congress." This language was later modified. The statute as enacted prohibits 
payment to boards not authorized by law. The Attorney General interpreted this 
legislative history to mean that commissions need not be authorized by specific 
statute but only have to be authorized generally. The opinion states "it would be 
sufficient if [commissions] authorized in a general way by law. "89 Thus, the 
Attorney General found that the Secretary of War was authorized by implication 
to appoint a committee of landscape architects to assist him in performing his 
duties of administration over Niagara Falls. 

The Comptroller General adopted the Attorney General's analysis when he 
approved the payments made to the committee of landscape architects involved in 
the administration of Niagara Falls. 90 The Comptroller General reaffirmed this 
conclusion when it authorized the payments to a board of experts appointed by 
the Secretary of Interior to assist in administration of Indian schools. The 
Comptroller General stated, "If a board of experts is necessary to accomplish the 
purposes indicated, the employment of the members thereof would be authorized 
under the provisions of this appropriation. Such a board would be authorized by 
law within the meaning of the act of March 4, 1909."^^ 

Despite these initial opinions, the Comptroller General soon began to read 
this prohibition more restrictively. In 1914, he refused to authorize the use of 
public funds to pay for the services of a commission which devoted itself to a 
matter it was not authorized by law to consider. The Mexican Border Commission 
had been authorized to negotiate boundary disputes. The comptroller determined 
that this Commission could not be paid for its work in negotiating the United 
States' and Mexico's rights to the use of water from the Rio Grande. 92 jhe 

Comptroller General also read the prohibition to bar payments to boards which 
were not clearly authorized by law. In 1925, the Comptroller General barred pay- 
ment for a board of consulting engineers employed to assist in construction of the 
Coolidge Dam. The statute authorized payment for individual consultants but did 
not explicitly authorize the appointment of a board of consultants. 93 jn another 
case, the Comptroller General determined that the Navy could not pay its share of 
the cost for arbitration of a contract dispute with a manufacturer because such a 
board was not authorized by law. 94 

In 1928, the Comptroller General applied the prohibition to an agency's 
submission to an arbitration panel. In reviewing a proposed lease between the 
government and a private company, the Comptroller General determined that the 
government could not accept a clause agreeing to arbitrate all disputes concerning 
the condition of the leased property at the end of the lease term. The Com- 
ptroller General rejected the arbitration clause for two reasons. First, he argued 



89. 27 Op. Atty. Gen at 437. 

90. 16 Comp. Dec. 282 (Nov. 2, 1909). 

91. 16 Comp. Dec. 422, 424 (Jan. 10, 1910). 

92. 20 Comp Dec. 643, March 18, 1914. 

93. 5 Comp. Gen. 231 (August 21, 1925). 

94. 5 Comp. Gen. 417 (Dec. 9, 1925). 



DISPUTE RESOLUTION PROCEDURES 193 

that the act of March 4, 1909^^ prohibited the payment of boards not authorized 
by law, stating simply that the arbitration board called for under the lease was 
unauthorized. Second, the Comptroller General argued that the government's 
provision for contract dispute resolution precluded resort to an alternate forum. 
The Comptroller General argued that the existence of established procedures for 
resolving disputes with the government precluded the use of arbitration. The 
Comptroller General states, "provision having been made by law for the adjust- 
ment of claims that may arise under government contracts, there is no power or 
authority in any administrative or contracting officer of the Government, by 
means of a provision in a contract, to establish or provide for a different 
procedure for the adjustment of such claims. "96 These two views were 

subsequently relied upon to invalidate arbitration clauses in two additional 
contracts. 97 

The Comptroller General subsequently returned to the broad view of the 
term authorized by law reflected in earlier opinions. In 194298 he quoted 
extensively from the Attorney General's 1909 opinion. 99 Criticizing subsequent 
opinions, the opinion held "Subsequent decisions applying a more strict rule on 
the basis that the creation of commissions, boards, and similar bodies must be 
specifically authorized by statute may not have taken cognizance of the earlier 
history of the matter. "100 Concluding that the question of authorization did not 
bar government agreement to the inclusion of an arbitration clause in a lease of 
government property, the Comptroller General turned to the more general question 
of whether the existence of a prescribed method for resolving disputes against the 
government precluded agencies from adopting alternative means for resolving 
disputes. 

The Comptroller General determined that there is no bar to the use of a board 
or panel to determine the factual question of reasonable value. Under the terms 
of the lease at issue, the government could only gain from the arbitration award 
as the lease provided that the value of the property could not be fixed at any 
rate less favorable than the original terms of the lease. The Comptroller General 
approved the inclusion of the arbitration clause under these conditions since the 
government could not lose under the process and the arbitrators were not 
deciding any questions concerning the legal liability of the government. These 
arbitrators were merely making a factual determination of the value of certain 
rental space. 

The Comptroller General has refused to extend its acceptance of the use of 
arbitration beyond the function of fact finding or appraising value. In 1953, he 
decided the Navy lacked authority to submit to arbitration as prescribed in a 
contract it had signed with a Swedish company. After reviewing several nine- 
teenth century court of claims decisions, the Comptroller General decided, "The 



95. 35 Stat. 1027. 

96. 7 Comp. Gen 541, 542 (March 3, 1928). 

97. 8 Comp. Gen. 96 (Aug. 28, 1928) and 19 Comp. Gen 700 (Feb. 3, 1940). 

98. 22 Comp. Gen 140 (July 10, 1942). 

99. Supra, note 90. 

100. 22 Comp. Gen. 140, 143. 



194 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

conclusion seems warranted that In the absence of statutory authorization, either 
express or Implied, officers of the Government have no authority to submit or to 
agree to submit to arbitration, claims which they themselves would have no au- 
thority to settle and pay. "1^1 He also concluded that Congress's express 
authorization of arbitration in some statutes, indicates that agencies generally 
lack the authority to submit to arbitration. The Comptroller General states, "The 
action of the Congress,... in authorizing the heads of executive departments to 
arbitrate certain specific and well defined matters might well, indicate ... that the 
executive branch has no general or inherent power to submit claims against the 
United States to Arbitration. "1^2 -p^e Comptroller General's opinion of agency 
use of arbitration remains unchanged. The opinion is not based upon any statute, 
but is an inference drawn by the Comptroller General from Congress's explicit 
authorization of arbitration in several statutes. 

The Comptroller General's most recent opinion concerning agency use of 
arbitration dates from 1978. ^^"^ The Federal Trade Commission requested an 
opinion concerning the agency's decision to resolve a factual dispute with a 
contractor through binding arbitration. The Comptroller General held that such 
substitution for prescribed dispute resolution procedures would be improper, 
although an arbitrator who is in fact an appraiser is a desirable adjunct to the 
normal dispute resolution procedures. The Comptroller General also reiterated his 
position that he was approving only arbitration's use to determine the fact of 
reasonable value in situations in which the arbitrator did not impose any 
obligation on the government or leave questions of legal liability for the ar- 
bitrator's determination. The Comptroller General approved of the FTC's use of 
arbitration "to render a determination as to the reasonable value of work per- 
formed by the defaulted contractor ... so long as the prescribed disputes proce- 
dure and provisions for judicial review incorporated therein are not displaced. "^^^ 

Thus, as a result of this line of holdings, the government cannot be bound 
by an agency's arbitration program unless it is specifically authorized by statute 
or is limited to factfinding. Absent these, an agency's arbitration must be 
nonbinding and hence the functional equivalent of a minitrial. 

Given the erratic interpretation of the statute read to ban the appointment 
of arbitrators unless specifically authorized and the relatively this justification of 
a ban based on Congress's inclusion of specific provisions for arbitration, it seems 
appropriate for Congress to clarify this matter. In particular, an executive 
branch official should be allowed to use arbitration for making decisions within 
his or her authority if they believe that would be a beneficial means of doing so. 
Such authority would not, of course, pre-empt the existing authority of the 
Comptroller General and the General Accounting Office for "determin[ing] whether 
payments of public funds are warranted by applicable law and available appropria- 



101. 32 Comp. Gen 333, 336 (Jan. 27, 1953). 

102. M. 

103. B-191484, May 11, 1978. 

104. Id. at 3. 



DISPUTE RESOLUTION PROCEDURES 195 

tions."!^^ Thus, an arbitral award would still be subject to a determination by 
GAO that its terms can be lawfully met. 



Article III 

The courts were clearly jealous of their prerogatives during the development 
of administrative law, and announced the need for judicial, not administrative, 
resolution of important matters, especially facts. 1^6 -phe need was raised to the 
Constitutional level. With the growth of the administrative state, the acceptance 
of decisions made by agencies and a limited form of judicial review -- to ensure 
that the determinations are based on substantial evidence -- also grew. The early 
doctrines gradually died.l^"^ Indeed, agency decisions became sufficiently accepted 
that few thought much about the old tension or that only Article III courts could 
hear and resolve some types of issues. Interestingly, the limitation on the use of 
entities other than courts to resolve matters has been rekindled recently. While 
it does not affect most administrative arbitration, the issue has arisen and it does 
define the outer boundaries of what can be done in it. The new requirements 
must clearly be taken into account when considering whether to develop a new 
administrative program. 

Northern Pipeline Co. v. Marathon Pipe Line Co ^Q^ held that the Bankruptcy 
Act of 1978 wrongfully delegated federal judicial power to individuals who are not 
Federal judges. Judges appointed under the Bankruptcy Act are not guaranteed 
the safeguards of life tenure and irreducibility of salary deemed essential to 
judges appointed under Article III. The arbitration program of the Federal 
Insecticide, Fungicide and Rodenticide Act (FIFRA) was challenged on the similar 
grounds that the use of an arbitrator denied the parties their right to have the 
issue resolved by an Article III court. ^^^ The Court upheld the constitutionality 
of private arbitrators determining the amount of compensation a second or 
"me-too" pesticide registrant must pay to a prior registrant when EPA uses data 
submitted by the first registrant in support of the second pesticide registration on 
the grounds that it is a "public dispute." 

The Court acknowledged Congress's discretion over the adjudication of 
public rights over one hundred years ago: 

There are matters, involving public rights, which may be 
preserved in such form that the judicial power is capable of 
acting on them, and which are susceptible of judicial 
determination, but which Congress may or may not bring 
within the cognizance of the courts of the United States, as 



105. Steadman, Schwartz, and Jacoby, Litigation with the Federal Government 
>. (2nd Ed. 1983) at 205. 

106. Ohio Valley Water Co. v. Ben Avon Borough , 253 U.S. 287 (1920); Crowell v. 
Benson , 285 U.S. 22 (1932). 

107. Davis, Administrative Law and Government at 69; Estep v. United States, 327 
U.S. 114, 142 (1946). 

108. 458 U.S. 50 (1982). 

109. Thomas v. Union Carbide Agricultural Products, 105 S. Ct. 3325 (1985). 



196 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

it may deem proper. HO 

FIFRA illustrates that the public rights doctrine extends to disputes between 
private parties. FIFRA empowers arbitrators, who are not Article III judges, to 
adjudicate disputes between pesticide registrants over amounts of compensation 
due as a result of EPA's use of previously submitted data. The Court notes that 
this right to compensation is statutorily based and that pesticide registrants lose 
any claim to compensation based upon state property law when they submit the 
data to EPA with knowledge of FIFRA's data use provision, m 

Although this right to compensation concerns private parties, the Court 
determined that this right carries many attributes of a public right since Congress 
created the right as part of a comprehensive regulatory scheme governing 
pesticide registration intended to safeguard the public health. The Court justified 
Congress's delegation to arbitrators by noting it could have granted EPA the 
power to decide the value or compensation due but instead chose to vest ar- 
bitrators with this authority. The use of this alternative does not raise this dele- 
gation of Congress's Article I legislative authority to the level of encroaching 
upon judicial power so as to violate Article III. 

FIFRA does provide a role for the judiciary in its regulatory framework, 
however. It authorizes judicial review of an arbitrator's decision in cases of 
fraud, misconduct and misrepresentation. In Thomas, the Court found that this 
scope of judicial review satisfies the need to ensure an "appropriate exercise of 
the judicial function" because it provides judicial protection against "arbitrators 
who abuse or exceed their powers or willfully misconstrue their mandate under 
governing law. "112 

The Court summarized the scope of Article III limitation upon the delegation 
of decisionmaking power: 

Congress, acting for a valid legislative purpose pursuant to 
its constitutional powers under Article I, may create a 
seemingly "private" right that is so closely integrated into a 
public regulatory scheme as to be a matter appropriate for 
agency resolution with limited involvement by the Article III 
judiciary. To hold otherwise would be to erect a rigid and 
formalistic restraint on the ability of Congress to adopt 
innovative measures such as negotiation and arbitration with 
respect to rights created by a regulatory scheme. H^ 

Thus, the public rights doctrine is a broad, flexible doctrine which author- 
izes the delegation of quasi-judicial, decisionmaking authority to non- Article III 
judges when Congress adopts innovative approaches to the resolution of disputes 
as part of a regulatory scheme. 

The latest explication of the nature of issues that agencies, and hence 



110. Murray's Lessee v. Hoboken Land , 18 How. 272, 284 (1856). 

111. 105 S. Ct. at 3335, citing Ruckelshaus v. Monsanto , 104 S. Ct. 2862 (1984). 

112. 105 S. Ct. at 3339. 

113. 105 S. Ct. at 3340. 



DISPUTE RESOLUTION PROCEDURES 197 

administrative arbitration, can hear came as recently as the end of last term. 
The D. C. Circuit held the Commodity Futures Trading Commission could not 
resolve a counterclaim involving state law in a proceeding arising out of the same 
transaction that was clearly within its jurisdiction because doing so would 
transcend Article III limitations. 1^"* The Supreme Court reversed, pointing out 
that Article III has two purposes: one is to protect an independent judiciary 
from encroachment by other fora, and the second is to afford parties the right to 
have their controversies heard by Article III judges. 

As to the first, the Court found the important factors to be considered are 

the extent to which the "essential attributes of judicial 
power" are reserved to Article III courts, and, conversely, 
the extent to which the non-Article III forum exercises the 
range of jurisdiction and powers normally vested only in 
Article III courts, the origins and importance of the right to 
be adjudicated, and the concerns that drove Congress to 
depart from the requirements of Article III.ll^ 

The Court sustained the agency's resolution of the state law claim on the 
ground that the courts would still be called upon to enforce the order; the legal 
rulings would be subject to de novo review; the range of issues presented is 
narrow; and, the scheme did not oust the courts of jurisdiction since the parties 
could still proceed there instead of before the agency. The Court found, there- 
fore, that the program was not a threat to separation of powers. 

With respect to whether the parties could "waive" their rights to an Article 
III court, the Court held in reviewing the CFTC program that 

as a personal right, Article Ill's guarantee of an impartial 
and independent federal adjudication is subject to waiver, 
just as are other personal constitutional rights that dictate 

the procedures by which civil and criminal matters must be 
tried. 116 

Thus, Article III does not appear to raise any limitations on the use of 
arbitration to resolve public disputes. Nor is it a limit for resolving private 
disputes so long as consent is freely given by the parties and the courts maintain 
at least some role in reviewing and enforcing the order. 

Article III could conceivably pose some restriction on the extent to which 
Congress could require mandatory arbitration as a way of resolving private 
disputes since the very limited judicial review could be regarded as an impermis- 
sible intrusion into the prerogatives of the judiciary. That courts are called upon 
to enforce the otherwise private award may not be sufficient basis of judicial 
involvement to protect this aspect of the separation of powers requirement. The 
Court's reasoning in Thomas, however, that the limited review of arbitral awards 



114. Schor V. Commodity Futures Trading Commission , 740 F.2d 1262 (D.C. Cir. 
1984), vacated , 105 S. Ct. 3325, reinstated , 770 F.2d 211 (D.C. Cir. 1985), 
rev'd , 106 S. Ct. 3245 (1986). 

115. Id. at 3258. 

116. Id. at 3256. 



198 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

is sufficient to provide the requisite level of judicial protection necessary to meet 
the standards of Article III would seem to apply with equal vigor to private 
actions. Thus, even the mandatory arbitration of private disputes appears to meet 
the standard develop in Schor. 

Congress has authorized the use of arbitration as a means for adjudicating 
disputes involving public rights in a number of statutes. For example, the 
Randolph- Shepard Vending Stand Act^l^ grants a preference to blind vending 
stand operators seeking sites on Federal property. Disputes concerning this 
program may be submitted to an arbitration panel convened by the Secretary of 
Education upon request of the individual, the state agency administering the 
program or by the Secretary. The arbitration panel's award is reviewable in the 
Federal District Court as if it were final agency action under the Administrative 
Procedure Act. 

Other instances of Congressional authorization of arbitration include CERCLA 
or SuperfundjH^ the Flood Insurance program, ^^ Department of Defense design 
bid competitions, 120 patent interference cases^^l a^d ^^e largest federal sector 
use of arbitration, the Civil Service Reform Act's requirement of arbitration of 
employee grievances. ^22 

Administrative arbitration programs have been assailed on several additional 
constitutional grounds. That lower courts have sustained some of the challenges 
indicates their potential seriousness. Properly designed and used, however, 
administrative arbitration fits comfortably within the constitutional framework-- 
at least as much as agencies themselves. 



Article II: Requirement for Executive Decisions 

Some issues may be so intertwined with government policy that they cannot 
be decided by a private arbitrator. Buckley v. Valeo ^^*^ held that the "perfor- 
mance of a significant governmental duty exercised pursuant to a public law"124 
can only be discharged by an Officer of the United States appointed in accor- 
dance with the Appointments Clause of the Constitution. 125 Tj^e argument has 
been raised as to whether a private arbitrator could be authorized to make a 



117. 20 U.S.C. Sec. 107. See discussion infra at note 132. 

118. 42 U.S.C. Sec. 9612(b)(4)(G). 

119. 42 U.S.C. 4083. 

120. 10 U.S.C. 277(e). 

121. 35 U.S.C. §135(d). An advance notice of proposed rulemaking to establish 
procedures for the arbitrations was published at 50 Fed. Reg. 2294 (1985). 

122. See 5 U.S.C. 4303 and 7512. 

123. 424 U.S. 1 (1976). 

124. Id. at 140-141. 

125. Article II, Section 2, Clause 2. 



DISPUTE RESOLUTION PROCEDURES 199 

Dinding decision in a matter in which an agency must make a final, binding deci- 
sion, such as in rulemaking or revoking a permit. 1^6 Even in the case of 
revoking a permit, however, it would not seem inappropriate if the parties -- the 
agency, the permittee, and the interested interveners -- agreed to resolve a 
contested issue by submitting it to arbitration. 127 Doing so would seem analogous 
to stipulating a factual premise of the action. The ability of the arbitral decision 
to withstand challenge from a non-participating third party would likewise appear 
to be similar to the ability of a disgruntled third party to challenge a stipulation. 
In both instances, the decision is made by the government official, albeit in the 
one he has agreed to be bound by the arbitrator's decision. The officer or 
government employee presumably will have made that decision on the ground that 
it is in the government's overall interest to arbitrate the claim as opposed to 
consume resources to chase the issue through a more elaborate process. 

The real question would seem to concern the extent to which the non- 
executive branch official is called upon to make policy determinations. As the 
quote from Buckley indicates, it is the significant decisions that must be made by 
government employees, not all decisions. Thus, the restriction would appear to 
bar the arbitrator's deciding major policy questions, not the factual basis of such 
a decision or a mixed question of law and fact in which the norms are already 
relatively well developed. Not only are these areas constitutionally doubtful, they 
are the very areas where the utility of arbitration is limited in the first instance. 
The Article II limits, therefore, do not appear to be a practical concern. 



Delegation to Private Parties 

A closely related issue is whether there may be limitations on the ability of 
the government to delegate powers to a private individual or institution. As the 
discussion above makes clear, the use of private arbitrators to make decisions 
closely affiliated with the government has been upheld on several occasions. 128 
Although the law on this issue is far from clear, 129 there are undoubtedly some 
limits. Thus, the more central the decision is to an issue that only the 



126. Memorandum of April 24, 1986 for Stephen J. Markman, Assistant Attorney 
General, Office of Legal Policy, from Samuel A. Alito, Jr., Dep. Ass't 
Attorney Gen., Office of Legal Counsel, Administrative Conference Recom- 
mendations on Federal Agencies' Use of Alternative Dispute Resolution 
Techniques. 

127. Indeed, EPA is considering doing just that with respect to the permitting of 
hazardous waste facilities. Robinson, U.S. Environmental Protection Agency 
Institutes Alternative Dispute Resolution in its Enforcement Program , 18 Dis. 
Res. News 6 (ABA Cmte. on Dis. Res. 1986). Memorandum of December 2, 
1986 to Ass't Administrators, Regional Administrators, Enforcement Policy 
Work Group, Draft Guidance on the Use of Alternative Dispute Resolution 
Techniques in Enforcement Cases . The draft recognizes the statutory 
limitations, however, and limits the use of binding arbitration to factual 
situations. Id. at 4. 

128. Thomas v. Union Carbide Agr. Products Co. , 105 U.S. 3325 (1985); Schweiker 
V. McClure , 456 U.S. 188 (1982). 

129. OLC Memorandum, supra note 126, citing Davis, Administrative Law Treatise 
3.12 (2d Ed. 1978). 



200 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

government can make, the more likely it is that an agency must be in a position 
to review the matter before it can be final. 

As in the discussion of the need for executive branch decisions, the extent 
to which this is a problem would seem to be directly correlated with the extent 
to which the arbitrator Is called upon to make policy decisions, and that is 
precisely the area in which the utility of arbitration Is questionable. For 
virtually all areas in which arbitration may be attractive, therefore, it does not 
raise constitutional difficulties. 



Due Process 

The manner in which reimbursements under Medicare are determined has 
been criticized as denying participants due process. Part A of the program 
provides insurance coverage for the cost of institutional health services, while 
Part B is a voluntary supplementary insurance program covering a percentage of 
costs for other medical procedures. Both parts are administered by private 
insurance carriers. Under the programs, claims for payment or reimbursement are 
submitted to the carrier. If the request is denied, the beneficiary may request a 
reconsideration. HHS' Health Care Financing Administration decides the matter 
for Part A and a different employee of the carrier makes the decision as to Part 
B. Under Part A, only controversies involving more than $100 may be appealed to 
the Secretary and judicial review is available only if the amount in dispute is 
$1,000 or more. Under Part B, the decision is final and non-reviewable. Thus, 
under Part B, a private "arbitrator" is assigned to decide the matter, and the 
decision is not subject to judicial review. 

The use of a private individual to make decisions that are, to some degree 
or another, administrative decisions is certainly anomalous. The question would 
logically arise whether the types of decisions that are referred to the private 
arbitrators are such that they should be decided by government officials. The use 
of the private carriers to make the decisions in Medicare Part B was challenged 
as a denial of due process. The District Court agreed "insofar as the final, 
unappealable decision regarding claims disputes is made by carrier appointees 
/'130 jn applying the test of Mathews v. Eldridge ,^^^ the court concluded that 
administrative law judges must hear the appeals. The Supreme Court 
reversed. 132 n held that the deciding employees did not have a conflict of 
interest since their salaries and any resulting claims are paid by the Government, 
not their employers. Moreover, the nature of the decision is determined by 
statute and regulation. Thus, the court found there is no reason to believe those 
making the decisions are not qualified to perform their tasks and hence that their 



130. Schweiker v. McCIure , 503 F. Supp 409, 418 (N.D. Cal. 1980). 

131. 424 U.S. 319 (1976). In determining the nature of a hearing that is minimal- 
ly required by due process, the court is to balance the private interest 
affected by the official action; the risk of erroneous deprivation of such an 
interest through the procedures used; and the probable value of additional 
procedural safeguards; against the government's interest, including the 
function and expense of additional or substitute procedural safeguards. 

132. Schweiker v. McCIure, 456 U.S. 188 (1982). 



DISPUTE RESOLUTION PROCEDURES 201 

margin of error is any greater than that for administrative law judges. 1^3 Thus, 
the court has approved private schemes at least to the extent they operate under 
procedures specified by the agency. 

The need for minimum procedural safeguards was stressed in a subsequent 
casel34 involving the question as to whether an oral hearing must be held for 
claims for less than $100 or whether a paper hearing would be sufficient. The 
court laid down guidelines that must be followed if the oral argument was to be 
avoided, especially the adequacy of notice, access to the evidence on which the 
decision was made, and the ability to speak with someone who knows and 
understands the basis for the decision. 

A second answer to the seeming conflict between using private arbitrators 
for public decisions is that the decisions are not entirely public: While the 
decisions may implement an administrative program and bear an intimate connec- 
tion to it, the decisions are not those of the agency and are basically for the 
resolution of a controversy between private individuals and organizations. l^o 



Unconstitutional Taking 

FIFRA was also challenged that the arbitration program constituted an 
unconstitutional taking of private property in violation of the Fifth Amendment. 
The Court rejected the challenge in Ruckelshaus v. Monsanto . ^^^ Monsanto 
alleged that EPA's use of its data for the benefit of another applicant's pesticide 
registration effected a taking of Monsanto's property without just compensa- 
tion. 137 The district court sustained the challenge. ^^^ The Supreme Court 
reversed, finding that while Monsanto and other data submitters may have a 
property interest in data submitted to EPA, these companies cannot allege that a 
taking occurs when EPA uses this data in a manner which was authorized at the 
time the data was submitted. 139 The Court noted, however, that under the 
statutory scheme in effect between 1972 and 1978 data submitters could have a 
legitimate claim that documents submitted under the designation "trade secrets" 
between 1972 and 1978 were improperly taken when used for the benefit of other 
pesticide registration applicants. I'^O Such an allegation would depend upon the 
actual amount of compensation received in arbitration. The Court found that 



133. 456 U.S. at 200. 

134. Gray Panthers v. Schweiker, 716 F.2d 23 (D.C. Cir. 1983). 

135. This is not the case in some of the Superfund cases in which a claimant 
disputes the Administrator's denial of liability or the amount claimed from 
the fund. 

136. 104 S.Ct. 2862 (1984). 

137. 104 S. Ct. at 2871. 

138. Monsanto Co. v. Acting Administrator, United States Environmental Protec- 
tion Agency^ 564 F. Supp. 552 (ED Mo. 1983). 

139. 104 S. Ct. at 2872-2877. 

140. 104 S. Ct. at 2877-2879. 



202 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

Monsanto had not yet had any issue of compensation submitted to arbitration and 
thus no issue of taking had yet arisen. ^^^ 

The Court held, however, that any data submitter seeking to contest an 
arbitrator's compensation award retains the right to challenge the amount of 
compensation in the United States Court of Claims. ^"^^ jhe Court ruled that the 
Tucker Act offers a potential remedy to any data submitter whose data is used or 
taken by EPA for the benefit of another applicant. Thus, any data submitter who 
is dissatisfied with an arbitration decision may sue the United States in the Court 
of Claims under the taking clause on the ground that it did not receive just 
compensation for the use of its data. 



Standardless Delegation 

FIFRA has also been assailed as an unconstitutional delegation of legislative 
power because the statute is alleged to offer so little guidance as to the stan- 
dards an arbitrator should apply in administering the data compensation program. 

The Supreme Court did not address this issue in JVlonsanto ^ '* 3 because 
Monsanto's claim concerning the constitutionality of the arbitration scheme was 
not ripe for review since it had not been subject to any arbitration. In contrast, 
the district court^'*'* had found the arbitration provision arbitrary and vague. 
Similarly, the district judge in Union Carbide Agricultural Products v. Ruckel- 



141. 104 S. Ct. at 2878. 



142. 104 S. Ct at 2880-2882. The Tucker Act, 28 U.S.C. § 1491 provides that 
any individual who believes that the United States has taken his property 
may bring this claim for compensation before the United States Claims 
Court. The Tucker Act states: 

The United States Claims Court shall have jurisdiction to 
render judgment upon any claim against the United States 
founded either upon the Constitution, or any Act of Con- 
gress, or any regulation of an executive department, or upon 
any express or implied contract with the United States or for 
liquidated or unliquidated damages in cases not sounding in 
tort. 

The Court held that in the absence of specific legislation addressing their 
interaction, the Tucker Act remedy and FIFRA's data compensation scheme 
must coexist. Thus, the Court interpreted FIFRA as "implementing an 
exhaustion requirement as a precondition to a Tucker Act claim. That is, 
FIF^A does not withdraw the possibility of a Tucker Act remedy, but merely 
requires that a claimant first seek satisfaction through the statutory 
procedure." 104 S. Ct. at 2881. 

143. 104 S. Ct. 2862 (1984). 

144. Monsanto v. Acting Administrator, United States Environmental Protection 
Agency, 564 F. Supp. 552 (ED Mo. 1983). 



DISPUTE RESOLUTION PROCEDURES 203 

shaus^^^ remarked that FIFRA represents a standardless delegation of power to 
arbitrators. 

The court in Sathon, Inc. v. American Arbitration Association l'*^ refused to 
issue a declaratory judgment as to the standard an arbitrator must apply in 
determining the amount of compensation due. Sathon sought a declaratory 
judgment to determine whether it must pay to an original data submitter a share 
of the cost of producing the data used or whether it must pay a share of the 
value of its use. The court sustained the vague criteria of "compensation," 
saying: 

It is up to Congress to say what standards are to be applied 
or to delegate this authority. There is nothing in the 
statute (or the regulations promulgated thereunder) relating 
to the standard to be applied in such proceedings or provid- 
ing for judicial intervention in such matters. 1^7 

Another court concurred that arbitrators under this scheme are not required 
to apply an particular allocation formula, and that the absence of a specific 
standard was not unconstitutionally impermissive as a denial of due process or 
excessively broad delegation of authority. ^^^ 

Conclusion: Properly Executed Arbitration Programs are Constitutional 

The courts which have interpreted the Multiemployer Pension Plan Amend- 
ments Act of 1980'sl49 (MPPAA) arbitration provisions thus far have been called 
upon to. determine the Act's constitutionality and have not actually reviewed an 
arbitration decision under the Act. MPPAA has oeen upheld against assertions 
that its provisions violate standards of due process;!^^ deny employers access to 
an impartial tribunal;!^! commit a taking of property without just compensa- 



145. 571 F. Supp. 117 (SD NY 1983), rev'd sub nom., Thomas v. Union Carbide 
Agricultural Products, 105 S. Ct. 3325 (1985). 

146. No. 83 Civ. 6019 (U.S. District Court N.D. 111., March 30, 1984) 20 ERC 2241. 

147. 20 ERC 2245. 

148. PPG Industries, Inc. v. Stauffer Chemical Co. , 637 F. Supp. 8 (D.D.C. 1986). 

149. P.L. No. 96-364, 94 Stat. 1217, codified at 29 U. S.C. Sec. 1381 et seq. 

150. See, Pension Benefit Guaranty Corp v. R.A. Gray , 104 S.Ct. 2709(1984) 
(Court held constitutional MPPAA's retroactive imposition of withdrawal 
liability.) 

151. See discussion in text. Board of Trustees of the Western Conference of 
Teamsters Pension Trust Fund v. Thompson Building Materials, Inc , 749 F. 2d 
1396 (9th Cir. 1984); Washington Star Company v. International Typographical 
Union Negotiated Pension Plan , 729 F. 2d 1502 (D.C. Cir. 1984); Peick v. 
Pension Benefit Guaranty Corp. 724 F. 2d 1247 (7th Cir. 1983). 



204 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

tion;152 violate the Seventh Amendment's provision for trial by jury;!^*^ and 
constitute a violation of Article III of the Constitution by vesting federal Judicial 
power in arbitrators who are not federal Article III judges. ^^^ 

Administrative arbitration programs have been attacked on a broad range of 
constitutional grounds. Thus far all the challenges have been rebuffed. It would 
therefore appear that such a program will pass constitutional muster and can de- 
cide any Issue an agency can so long as they adhere to at least minimal proce- 
dures, avoid major policy matters, and are subjected to at least some judicial 
review -- even the narrow standard of the Arbitration Act. 



V 

HYBRID PROCESS 

As should be clear by now, several of the administrative arbitration programs 
are actually hybrids between administrative and private sector processes. ^^^ Ttiey 
typically are used to resolve issues that arise because of an administrative 
program and are administered at least in part by an agency, but they are not part 
of the agency itself. That is, the decision reached is not an agency order. The 
agency, however, is charged with defining the process to be followed. Sometimes, 
as in Superfund, the agency is a party, but in others, such as PBGC and FIFRA, 
it is not. It seems likely that prior to the interest in alternative means of 
dispute resolution the issues submitted to arbitration would have been resolved by 
the agency itself in some sort of trial type hearing. For example, prior to 
FIFRA's amendment, EPA made the determination as to how much compensation is 
due; now the arbitrator does.^^^ Since the programs are so intimately connected 
to the agency and Implement part of an agency program, they have some of the 
attributes^^^ of agency action. Moreover, in some of the programs, the arbitra- 
tion is the only forum available for resolving the matter. It is therefore unlike 
voluntary arbitration and more like an administrative or judicial hearing in which 
the process is imposed on the parties. Thus, administrative arbitration might 
sometimes be thought of in conceptual terms as similar to an administrative 
hearing. 



152. Board of Trustees of the Western Conference of Teamsters Pension Trust 
Fund V. Thompson Building Materials, Inc ., 749 F. 2d 1396, 1406 (9th Cir. 
1984) (taking clause does not prohibit Congress from readjusting contractual 
relationships of private parties); accord, Peick v. Pension Benefit Guaranty 
Corp. , 724 F. 2d 1247, 1274-1276 (7th Cir. 1983). 

153. Washington Star Company v. International Typographical Union Negotiated 
Pension Plan , 729 F. 2d 1502, 1511 (D.C. Cir. 1984); Peick v. Pension Benefit 
Guaranty Corp. , 724 F. 2d 1247, 1277 (7th Cir. 1983). 

154. Board of Trustees of the Western Conference of Teamsters Pension Trust 
Fund V. Thompson Building Materials , 749 F. 2d 1396, 1404-1406 (9th Cir. 
1984). 

155. FIFRA, PBGC, Superfund. 

156. See discussion infra at note 404. 

157. E.g. judicial review for some, but not all of them. 



DISPUTE RESOLUTION PROCEDURES 205 

But, these programs also have some of the attributes of private sector 
arbitration, such as a reduced record, a private arbitrator, the parties' having a 
role in choosing the person who will decide, and decisions required by rule to be 
reached far more quickly than is customary for administrative litigation. 

The administrative arbitration programs are, therefore, to a very real extent 
a hybrid, having both public and private characteristics. Sometimes the two 
collide. The difficulty is made more confusing by no two being alike. 



The Arbitrators. 

Arbitrators are basically selected in one of three ways in administrative 
arbitration programs, although a fourth way is clearly possible. The first is the 
private analog in which the parties participate in selecting the arbitrator. They 
may agree directly on an individual to serve as the arbitrator. Barring that, and 
the procedure contemplated in several of the programs, the parties are tendered 
a list of potential arbitrators. Each party may then either strike a designated 
number of individuals from the list or rank those on the list according to 
preference. The arbitrator is then chosen from those remaining on the list or 
from those with the highest overall ranking. 1^^ 

The PBGC is a fairly typical example as to how arbitrators are selected. 
Under the PBGC final rules, the parties shall select an arbitrator within 45 days 
of initiation of arbitration or at a mutually agreed time. Several comments to the 
proposed rule on this issue suggested allowing the parties to select the arbitrator 
before initiation of arbitration. PBGC rejected the suggestion because it believes 
that post-initiation selection will reduce the risk of jeopardizing the arbitrator's 
neutrality. 1^^ 

In its proposed rules, the PBGC invited comments on the usefulness of a 
PBGC-maintained roster of qualified arbitrators. The PBGC agreed with the 
majority of comments that such a roster would duplicate those already maintained 
by private organizations. PBGC will not, therefore, implement the proposal. 160 
The American Arbitration Association (AAA) maintains a roster of qualified arbi- 
trators from which it makes selections after parties in dispute have had an 
opportunity to rank the acceptability of the candidates. 1^1 The PBGC noted in 
the preamble of the final rules, however, that plan sponsors may still maintain 
their own rosters without violating preselection restrictions. lo2 

The PBGC .rules do not state specific qualifications for the arbitrator 
because, after considering comments on the issue, the PBGC determined that the 
arbitrator would assuredly be qualified because the parties are required to select 



158. Superfund; see discussion at note 567. FIFRA; see discussion at note 416. 

159. 50 Fed. Reg. 34686. 

160. 50 Fed. Reg. 34679. 

161. AAA rules - Section 12. 

162. 50 Fed. Reg. 34680. 



206 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

him by mutual agreement. "^ 

Upon accepting an appointment, each arbitrator must disclose to the parties 
any "circumstances likely to affect his impartiality. "^^^ If any party determines 
that the arbitrator should be disqualified on the ground that he is not impartial, 
he must request, within 10 days, that arbitrator withdraw. If the arbitrator 
agrees that he is no longer impartial, he must withdraw from the proceeding and 
notify the parties of his reasons. ^^^ One comment to the PBGC proposed rule 
on this issue argued that disqualification would be too easy under the rule, while 
another argued that the rule should provide the parties with a mechanism to 
compel the arbitrator to withdraw. The PBGC concluded that its final rule has 
struck a reasonable balance. ^^^ 

If a selected arbitrator declines appointment or, after accepting, withdraws, 
dies, resigns, or is for some reason unable to perform his duties, the parties shall 
select another arbitrator within 20 days of receiving notice of the vacancy. ^^"^ 
PBGC initially proposed allowing 45 days for selecting a new arbitrator but 
reduced the limit because the parties will have had already identified suitable 
candidates during the original selection. 1^^ The parties may seek designation 
and appointment of an arbitrator in a U.S. District Court if they are unable to do 
so within the time limit of the rules. 1^^ 

The second way is for the arbitrator to be a private individual who is 
imposed on the parties without their participating in the selection. This process 
is used in any of the case studies, and it is followed in the administration of the 
Medicare program administered by the Department of Health and Human Services. 

The third means of obtaining an arbitrator is for the agency to appoint an 
agency official to serve that function. The CFTC and the MSPB follow this 
model. This is unlike the typical binding commercial arbitration, but quite similar 
to the non- mandatory court annexed programs. The dispute in both instances is 
submitted to the arbitrator only with the parties' concurrence. Thus, the parties 
can decide whether the nature of the dispute and their respective needs are such 
that this procedure is in their interest to pursue. Hence, although some of the 
protections normally afforded in arbitration is lacking, the parties are in a 
position to make the choice of whether or not to invoke the process. Indeed, the 
Medicare decision would indicate that the process should be fully acceptable even 
if imposed on the parties, so long as minimally acceptable procedures are followed 
in reaching the decision. 



163. 50 Fed. Reg. 34679. 

164. § 2641.3(b). 

165. ^ 2641.3(c). 

166. 50 Fed. Reg. 34681. 

167. § 2641.3(d). 

168. 50 Fed. Reg. 34681. 

169. § 2641.3(e). 



DISPUTE RESOLUTION PROCEDURES 207 

The fourth means of appointing an arbitrator would be for the parties to 
choose from among a list of agency personnel. The Chicago office of the Merit 
System Protection Board are selected in this way,1^0 and arbitrators for Super- 
fund are selected from an agency approved list of private individuals. 



Norms and Precedents. 

Some administrative arbitration programs are directed to apply existing law 
and precedent. 171 In such cases, they are alternative procedures to the same end 
as a more formal process. 1^2 

Several of the programs are explicitly non-precedential, in that an arbitral 
decision in a matter cannot serve as resolving any issue for any purpose other 
than that before the arbitrator. 1^3 jhe CFTC believes the lack of precedential 
or res judicata effect is a positive incentive to use the arbitration process since a 
decision will not have a potentially damaging collateral effect. 1^'* Several 
comments on the PBGC's proposed rule indicated, however, that they thought 
compiling the awards would provide valuable guidance for future decisions. 



170. Adams and Figueroa, Expediting Settlement of Employee Grievances in the 
Federal Sector, (Report to ACUS Evaluating MSPB's Appeals Arbitration 
Procedure) (1985) at 31. 

171. PBGC, CFTC, MSPB. Whereas the arbitrator in the PBGC is to apply 
existing law, the agency has noted that the regulation establishing the 
program does not tell the arbitrator just where or how to find it. 50 Fed. 
Reg. 34,681. 

172. For example, in reviewing the difference between arbitration under a 
collective bargaining agreement and review by the Merit Systems Protection 
Board, the court said: 

While undoubtedly hoping to encourage employee selection of 
the grievance-arbitration process, Congress did not wish that 
choice to be made on the basis of a predictable difference in 
substantive outcome. To the contrary, it envisioned a system 
that would, as between arbitration and MSPB procedures, 
'promote consistency ... and ... avoid forum shopping.'" TTius, 
"the arbitrator's authority can be no less than the MSPB's 
but also ... it can be no greater." Devine v. Pastore , 732 
F.2d 213, 216 (D.C. Cir. 1984). 

And see, Cornelius v. Nutt, 105 S.Ct. 2882 (1985). 

173. CFTC. For example, in Superfund, 40 C.F.R. 305.51(c) provides; 

No award or decision shall be admissable as evidence of any 
issue of fact or law in any proceeding brought under any 
other provision of CERCLA or under any other provision of 
law. Nor shall any prearbitral settlement be admissable as 
evidence in any such proceeding. 

174. Nelson, CFTC's New Rules; Some Innovative Approaches to Adjudication ; 9 
Ad. L. News 1 (1984). 



208 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

Unlike the others, the FIFRA program does not provide any guidance to the 
arbitrator as to the norm to apply. Because of its lack of standards, It has been 
attacked as an impermissive grant of legislative power to the arbitrator, and at 
least two courts have agreed. ^^^ Others, however, have not.^'^^ The matter is 
likely to be raised again until a definitive resolution is made.^^^ Whether 
permissible or not, such standardless arbitration appears inadvisable. Arbitration 
is generally not appropriate for developing a "common law" or other definitive 
norm that is to provide guidance for future conduct. ^^^ Without existing 
standards and without such a common law, decisions would run the risk of being 
arbitrarily ad hoc when criteria should be developed. The major issue -- whether 
compensation should be based on cost of developing the data or its value once 
developed -- is not likely to be resolved by the expertise of the administrator, 
nor supplied by reference to an external standard. At minimum, such a program 
should authorize the affiliated agency to issue rules to establish the major 
guidelines that will be applied. 



Record and Explanation. 

The Administrative Procedure Act and many of the cases Imposing the 
requirement for "some sort of hearing"!^^ rely largely on paper for minimal 
quality control: They require a decision to be based on a record and be explained 
as to what facts the decision maker believes flow from that record, as well as the 
conclusions of law. This process permits a reviewing court or other body to look 
over the shoulder of the decision maker to ensure an acceptable level of ac- 
curacy. A major advantage of arbitration is its speed and finality, with the 
quality control provided by other means. In it, paper is a means to the decision 
but largely ancillary for purposes of oversight. The nature and purpose of the 
"record" is therefore different in arbitration as opposed to a judicial or ad- 
ministrative hearing. 



175. Monsanto v. Acting Administrator , 564 F. Supp. 552 (E.D. Mo. 1983), rev'd on 
other grounds sub nom. Ruckelshaus v. Monsanto Co. , 104 U.S. 2862 (1984); 
Union Carbide Agricultural Products v. Ruckleshaus, 571 F. Supp 117 
(S.D.N.Y. 1983), rev'd sub nom, Thomas v. Union Carbide Agricultural Pro- 
ducts, 105 S. Ct. 3325 (1985). 

176. Sathon, Inc. v. American Arbitration Association , 20 ERC 2241 (N.D.IU. 1984). 

177. The Issue was pressed In the Supreme Court in Thomas v. Union Carbide 
Agricultural Products Co., 1055 S. Ct. 3325 (1985) but the Court decided it 

was neither adequately briefed nor argued to this Court and was 
not fully litigated before the District Court. Without expressing 
any opinion on the merits, we leave the Issue open for determina- 
tion on remand. 

105 S. Ct. at 3340. 

178. Although addressing problems with settlements and not arbitration, the need 
for establishing and adhering to norms is raised by Edwards, Fiss, (1984), 
and Schoenbrod, all supra, note 66. 

179. Friendly, Some Kind of Hearing , 123 U. Pa. L. Rev. 1267, 1316 (1975). 



DISPUTE RESOLUTION PROCEDURES 209 

Thus, for example, in most of the administrative arbitration programs that 
were surveyed, a full record could be generated at the request of a party but are 
not as a matter of course. To be sure, the arbitral decisions turn on written 
materials that are disgorged through some sort of discovery and introduced at a 
hearing but, absent a request, transcripts of the hearing are typically not kept 
nor are the decisions explained with the rigor of an administrative decision.l^O 
The decision is usually a review of the factual and legal basis of the decision, but 
the rules typically indicate it is to be more abbreviated, 

I£ administrative decisions are to be fully reviewed in another forum, 1^1 
they may need a fuller explanation and a more fully developed record than is 
customary in private sector arbitration. That, of course, comes at the expense of 
time and cost; and, indeed, subsequent review also comes at the cost of finality. 



Privacy. 

One of the reasons parties sometimes choose private sector arbitration is 
that the record and the decision itself can be kept private and confidential. To 
the extent the arbitration is viewed as part of an administrative program, the 
expectation would be that they should be accessible to the public, or conducted 
"in the sunshine," In those programs in which the program is a part of the 
agency itself and results in an agency decision, 1^2 h^q Freedom of Information 
Act would apply and hence the record would be subject to full public access. 
The others, however, do not result in an agency decision. Thus, if the agency is 
not a party, 1^3 POIA would not apply, ^^^ In that case, the proceeding likely 



180. This point was emphasized by the D,C, Circuit in a case reviewing the 
nature of judicial review of an arbitrator's decision concerning disciplinary 
proceedings against a government employee: 

If arbitration becomes simply another level of decision 
making, subject to judicial review on the merits, arbitrators 
may begin to decide cases and write opinions in such a way 
as to insulate their awards against judicial reversal — 
producing opinions that parrot the appropriate statutory 
standards in conclusory terms, but suffer from a lack of 
reasoned analysis. Such a shift from the arbitral model, in 
which decision makers are free to focus solely on the case 
before them rather than on the case as it might appear to an 
appellate court, to the administrative model, in which 
decision makers are often concerned primarily with building a 
record for review, would substantially undercut the ability of 
arbitrators successfully to resolve disputes arising out the 
employment relationship, Devine v. White , 697 F,2d 421, 436 
(D.C, Cir, 1983). 

181. See infra concerning agency and judicial review. 

182. MSPB, CFTC 

183. PBGC, FIFRA 

(continued...) 



210 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

could remain confidential absent overriding rules or statute. If, of course, the 
agency Is a party, as in Superfund, then FOIA would apply to its records and 
hence likely that of the entire proceeding. 



Review by the Agency. 

To the extent the arbitration results in an agency order, the traditional 
relationship between the decision made by the hearing officer and the agency 
would provide for either appeal to the agency or discretionary review by the 
agency on its motion. One of the attributes of voluntary arbitration, however, is 
its finality. Thus, again, the two concepts collide in concept. 

The Merit Systems Protection Board, for example, initially provided for 
agency review only to address harmful procedural irregularity or a clear error of 
law. While more review than under commercial arbitration, it was more limited 
than usual. In response to views of the parties that typically appear before it, 
the Board changed its Appeals Arbitration Procedure into the Voluntary Expedited 
Appeals Procedure in part to provide full appeal to the agency. 

The CFTC's arbitration program provides that the agency may review a 
decision on its own motion to determine that it is not the result of any fraud, 
partiality, or other misconduct. In this case, the agency is providing the same 
narrow review typically accorded voluntary arbitration. 

To the extent the arbitral award becomes an agency order, it would seem 
appropriate for the agency to have some power to review to ensure it meets 
minimal levels of acceptability. To ensure the benefits of expedition and finality, 
however, that review should be quite narrow, probably akin to the standard of 
judicial review under the arbitration act. Thus, an agency should review only for 
gross deviation from policy or procedure, which is the administrative analog of 
the award's being outside the scope of the arbitrator's authority. 

The hybrid programs, 185 however, have no review by the agency. That is 
likely stems from a view that the very reason for the arbitration is that the 
matter is largely a private sector dispute that does not require agency action. 186 



184. Even if a private arbitrator is retained by an agency, it would not appear 
that the arbitrator's records that are developed in a hearing are agency 
records for purposes of FOIA. They would seem analogous to records 
developed by a government contractor to which the government has access, 
in which case the Supreme Court held that they are not agency records. 
Forsham v. Harris, 445 U.S. 169 (1980). Moreover, if the record remain in 
the possession of the arbitrator, the agency is not obligated to retrieve 
them. Kissinger v. Reporters Committee for Freedom of the Press, 445 U.S. 
136 (1980T^ 

185. PBGC, FIFRA, Superfund. 

186. Superfund does not fit this model. Its arbitration program applies standards 
developed by the agency and determines the agency's liability. Thus, it is 
clearly not a "private" dispute. The fact that the decision is not made by 

(continued...) 



DISPUTE RESOLUTION PROCEDURES 211 

Hence there is no reason for the agency to be involved in reviewing let alone 
deciding. 



Judicial Review 

There are essentially three forms of judicial review of administrative 
arbitration decisions: none; limited, akin to traditional arbitration; and some 
variant of the APA's arbitrary and capricious standard. 

No Review; Waiver . If parties decide to use an arbitration program to 
resolve an existing dispute, one component of that election could be a waiver of 
any right to seek the judicial review normally accorded administrative action. 
That is, by opting into arbitration, the parties would opt into its full ramifica- 
tions, including its finality. The CFTC programs follow this approach. The 
Supreme Court recently sustained such waivers of judicial review on the ground 
that the right to have the dispute heard by an Article III court is a personal one, 
and hence it may be waived. ^^^ 

The extent to which such waivers are enforceable when the election is made 
before the dispute arises is open to question, at least in some instances. The 
Supreme Court has held that a predispute agreement to arbitrate any claim that 
would arise between a securities broker and its customer is not enforceable since 
it could derogate rights provided by the Federal securities laws.^^^ Although the 
case has been questioned and limited, ^^^ it continues to stand for some limitation 
on the ability of a person to sign away his or her rights to an administrative or 
judicial proceeding. Moreover, the Court has followed this line of reasoning in 
other cases. It recently held that even though some aspects of a matter may be 
arbitrated, an arbitral award could not preclude a judicial role in protecting the 
federal statutory and constitutional rights that Section 1983 is designed to 



18 6. (...continued) 

an agency official may indicate a distrust for the ability of separation of 
functions doctrines to result in impartiality while still wanting to maintain 
enough control over the process that it will result in expeditious, acceptably 
decisions; the alternative would be to rely on the courts, and the agency 
could not set the agenda there. 

187. Schor v. Commodity Futures Trading Commission , 106 S. Ct. 3245 (1986). 

188. Wilko V. Swann , 346 U.S. 427 (1953). 

189. See, Dean Witter Reynolds Inc. v. Byrd , 105 S. Ct. 1238 (1985). The lower 
courts split as to Byrd's effect, with some holding that preenforcement 
agreements to arbitrate securities disputes were enforceable, Halliburton A 
Assoc, Inc. V. Henderson, Few & Co., 774 F.2d 441 (11th Cir. 1985), while 
others disagreed and continued to apply Wilko's traditional limitation, 
Conover v. Dean Witter Reynolds, Inc., 794 F.2d 520 (9th Cir. 1986). 

The Supreme Court has granted certiorari to resolve the matter. McMahon 
v. Shearson/American Express, 788 F.2d 94 (2d Cir.) cert, granted , 107 S. Ct. 
60 (1986). The resolution of this case should have a significant effect on the 
extent to which predispute agreements to arbitrate matters involving of 
public policy are enforceable. 



212 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

safeguard. 130 Thus, neither full faith and credit nor a common law rule of 
preclusion of review would permit a court to accord res judicata effect to an 
unappealed arbitration award. 

The combined teaching of these cases is that if a dispute involves important 
public rights, the court may invalidate an agreement to subject them to binding 
arbitration and hence a party could still have the matter heard in a traditional 
manner. 191 In other instances, however, the agreement is enforced, and the 
matter is referred to arbitration, with its limited review. 1^2 while technically not 
"waiver" cases in that such an agreement would preclude judicial review altogether 
and arbitration has some judicial review, the cases do mark an outer boundary of 
the ability of parties to sign away their rights before a dispute arises. 

Limited . Judicial review of traditional arbitration awards is very narrow. 
The United States Arbitration Act^^*^ directs courts to enforce the awards except 
(a) where it was procured by corruption, fraud, or undue means; (b) where there 
was evident partiality or corruption in the arbitrators; (c) where the arbitrators 
were guilty of misconduct in the conduct of the hearing to the extent the rights 
of any party were prejudiced; or (d) where the arbitrators exceeded their powers 
assigned under the agreement. l^'* 

The standard applied in FIFRA tracks this approach. It provides for judicial 
review only in the case of "fraud, misrepresentation, or other misconduct by one 
of the parties to the arbitration or the arbitrator. ..."l^^ The Court has ack- 
nowledged that limited judicial review is permlssible^^^ ^^d has upheld it against 



190. MacDonald v. City of West Branch , 104 S. Ct. 799 (1984). See also, Alexan- 
der V. Gardner-Denver , 415 U.S. 36 (1974). 

191. Other aspects of an arbitration agreement may be enforced, however. Thus, 
when a securities agreement provided that "Any controversy between you and 
the undersigned arising out of or relating to this contract or breach thereof 
shall be settled by arbitration" the portion arising under the Federal law was 
heard by a court since the dealer assumed it would not be referred to 
arbitration, but that arising under state law was ordered arbitrated. Dean 
Witter Reynolds Inc. v. Byrd , 105 S. Ct. 1238 (1985). 

192. Mitsubishi Motors Corp. v. Soler Chrysler- Plymouth , 105 S.Ct. 3346 (1985). 

193. 9 U.S.C. § 10. 

194. As "a matter of federal law, any doubts concerning the scope of arbitrable 
issues should be resolved in favor of arbitration." Moses M. Cone Memorial 
Hospital V. Mercury Construction Corp., 460 U.S. 1 (1983). 

195. 7 U.S.C. Sec. 136a(c)(l)(D)(ii). 

196. Many matters that involve the application of legal standards to facts and 
affect private interests are routinely decided by agency action with limited 
or no review by Article III courts. See, e.g., 5 U.S.C. §§ 701(a)(1), 701(a)(2); 
Heckler v. Chaney , 105 S. Ct. 1649 (1985); United States v. Erika, Inc., 456 
U.S. 201, 206, (1982) (no review of Medicare reimbursements); Monaghan, 
Marbury and the Administrative State , 83 Colum. L. Rev. 1, 18 (1983) 
(administrative agencies can conclusively adjudicate claims created by the 

(continued...) 



DISPUTE RESOLUTION PROCEDURES 213 

a challenge that it constitutes a wrongful delegation of judicial power to the 
arbitrator. 197 jhe Supreme Court left open the possibility, however, that a 
dissatisfied data provider could sue in the Court of Claims for a "taking" under 
the Tucker Act.^^^ Thus, the Court seems to indicate that it does not regard the 
arbitral award as a judicial finding, since presumably there would be no "taking" 
if the amount were judicially determined. ^^^ This may result in the anomalous 
result that a dissatisfied data submitter could obtain judicial review of the arbi- 
tral award by suing in the Court of Claims, whereas the data user may have 
difficulty securing a similar review. 

Arbitrary or Capricious . The MSPB and Superfund programs both provide for 
"arbitrary and capricious" scope of judicial review. 200 For example, the Super- 
fund rules provide: 



19 6. (...continued) 

administrative state, by and against private persons); Redish, Legislative 
Courts, Administrative Agencies, and the Northern Pipeline Decision , 1983 
Duke L. J. 197 (same). 

Thomas v. Union Carbide Agricultural Products, Inc., 105 S. Ct. 3325, 3334 
(1985). 

197. Thomas v. Union Carbide Agricultural Products, Inc., 105 S. Ct. 3325 (1985). 

198. Ruckelshaus v. Monsanto , 104 S. Ct. 2826 (1984). 

199. The Court has made quite clear that arbitration is not a judicial proceeding 
subject to full faith and credit. Dean Witter Reynolds Inc. v. Byrd , 105 S. 
Ct. 1238 (1985). 

200. Under the Randolph- Sheppard Vending Stand Act, 20 U.S.C. Sec. 107, blind 
persons who are licensed as vendors by state agencies may receive prefer- 
ence in obtaining vending stands on federal property. An individual who is 
dissatisfied with the state agency's actions may obtain a hearing on the 
state level. If he or she remains dissatisfied, he or she may request the 
Secretary of Education to establish an arbitration panel to hear the dispute. 
A state agency may also request arbitration whenever it believes a federal 
agency or department is not complying with the Act. 

The arbitration is the exclusive remedy for an alleged grievance, not- 
withstanding Congress's saying it "may" be used. Hence someone who 
believes he or she has been denied such a preference must submit the 
complaint to arbitration before pursuing the matter in court. That is, it has 
been held that the arbitration is an administrative remedy that must be 
exhausted before a court will entertain the complaint. Randolph- Sheppard 
Vendors of America v. Weinberger, 795 F.2d 90 (D.C. Cir. 1986). 

While the awards are "final and binding on the parties," 20 U.S.C. Sec, 
107d-l, they are "subject to appeal and review as a final agency action" 
under the APA, 20 U.S.C. Sec. 107d-2. Thus, the arbitrary or capricious 
standard applies to these arbitrations. The court in Georgia Department of 
Human Resources v. Bell, 528 F. Supp 17 (N.D. Ga. 1981) reviewed an award 
under 5 U.S.C. Sec. 706 as final agency action, as if it had been made by 
the agency itself. 



214 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

The award or decision of [an arbitrator] shall be binding and 
conclusive, and shall not be overturned except for arbitrary 
or capricious abuse of the [arbitrator's] discretion. 201 

The scope of review under PBGC is more complicated. One part of the 
statute indicates that the arbitrator's findings of fact are to be presumed correct 
subject to rebuttal only by a clear preponderance of the evidence. 202 This would 
appear to provide for de novo judicial determination of issues of law and a review 
of facts under a "clear preponderance of the evidence" standard. The matter is 
confused, however, by another section of the Act which directs that, to the 
extent consistent with the Multiemployer Pension Plan Amendments Act of 1980, 
the awards are to be enforced under the limited provisions of the United States 
Arbitration Act. At least one court has held that only the limited scope of 
review provided commercial arbitration Is available. 203 Most courts, however, 
have Interpreted the Act as providing for the broader review. 

One case draws an Important analogy between the arbitration and admini- 
strative agencies. 204 n argues that "judicial deference to the arbitration process 
[under the Act] Is mandated by the same policies that underlie the principles of 
judicial deference to administrative agencies. "205 Thus, the decisions are 
reviewable, like those of an agency, to determine whether the applicable law was 
correctly applied and whether the findings comport with the evidence. Like an 
agency, the arbitrator will be someone skilled In pension and labor matters and 
thus likely to fashion a resolution superior to a court In matters within that 
expertise. 

An MSPB case wrestled with the relationship between an arbitration award 
and the court In words reminiscent of the origins of the "hard look" doctrlne:206 

For judicial deference to arbitral decisions to have meaning- 
ful application, the reviewing court must be confident that 
the arbitrator has undertaken a thorough review of each 
aspect of the ... action. 207 

Thus, the standard that has evolved In several of the administrative arbitra- 
tion programs Is for a court to review an award as if it were a decision of an 
agency. This standard may be appropriate In those cases where the arbitration Is 



201. 40 C.F.R. Sec. 305.51; 42 U.S.C. Sec. 9612(b)(4)(G). 

202. 29 U.S.C. Sec. 1401(b)(2), (c). 

203. Washington Star Company, v. International Typographical Union Negotiated 
Pension Plan , 729 F.2d 1502 (D.C. Clr. 1984). 

204. lAM National Pension Fund Benefit Plan C v. Stockton TRI Industries, 727 
F.2d 1204 (D.C. Clr. 1984). 

205. M. at 1207. 

206. Greater Boston Television Corp. v. FCC , 444 F.2d 841 (D.C. Clr. 1970), cert 
den. 403 U.S. 923 (1971). 

207. Local 2578 AFGE v. GSA, 711 F.2d 261, 267 (D.C. Clr. 1983). 



DISPUTE RESOLUTION PROCEDURES 215 

mandatory,208 in that it is the only means available for resolving the dispute. In 
that case, the fuller judicial review may be an important protection. Even in this 
case, however, the courts should recognize the benefits that were supposed to be 
derived from the arbitration scheme, as opposed to reliance on administrative 
adjudication under the APA, and hence accord deference to the arbitral award or 
some other form of limited review so long as there is an indication of the proper 
standards' being applied. 209 Perhaps, the proper standard of judicial review 
should be no different than that of agency action before it became more intru- 
sive: a rational basis test. 



VI 
CONCLUSION WITH RESPECT TO ADMINISTRATIVE ARBITRATION 



Some of the administrative arbitration programs track their private sector 
analogs quite closely. The Commodity Futures Trading Commission's program, for 
example, applies to cases where time and transaction costs probably outweigh the 
need for procedural rigor, and the decisions are final. 210 other programs, 
however, do not fi:^ so well. The FIFRA program, for example, has the finality 
normally accorded arbitration, but it would appear that at least in some instances 
a large amount of money would be at stake and there are no guidelines for how 
the decision will be made. Moreover, that lack will probably not be rectified by 
the expertise of the arbitrator. Some norm — whether through statutory 
prescription, agency rule, or developed common law -- would be in order. Were 
it established, the matter would then be better suited for arbitration since it 
would be more a matter of accounting or otherwise applying existing criteria. In 
either event, the margin for error would be substantially reduced. As it stands, 
any need for expedition probably does not outweigh \he need for a standard. 

Most of the administrative arbitration programs have two significant 
differences between them and traditional arbitration: First, this use is not 
voluntary, either before or after a dispute has arisen, but rather it is the only 
available means of making the decision. 211 Second, the greatest difference 
between most of the administrative arbitrations and private sector commercial 
arbitration is that the arbitral award is subjected to a scope of jucm^ial review 
very similar to that of an administrative action, even when the award itself is not 



208. Mandatory arbitration seems inappropriate except in those cases when the 
benefits of a trial type hearing are clearly and substantially outweighed by 
the need to (1) save time or other transaction costs or (2) have a technical 
expert resolve the issues. Otherwise, the "arbitration" is really stripped 
clean adjudication and the hallmark of arbitration — its voluntariness — is lost, 

209. Devine v. White , 697 F.2d 421 (D.C. Cir 1983). 

210. Compare this with the criteria at notes 63-67. 

211. Moreover, this relationship between the courts and the arbitration is 
different from that of typical court annexed arbitration where there is a 
trial de novo before the court, sometimes with disincentives against frivolous 
appeals. 



216 



ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 



an agency order. 212 

Even though each program differs from the others, what seems to be 
evolving Is a form of "administrative arbitration" In which the agency Is at best 
passive. The adjudication -- In the form of the arbitration -- Is outside the 
agency, but the relationship between It and the court is similar to that of the 
court and an agency with respect to Informal adjudication. Once that Is re- 
cognized, It provides a new tool for addressing a range of Issues that do not need 
the full rigor of APA trial type hearings but more judicial oversight than 
customarily applied in arbitration. Most seem to contemplate that the decision 
Itself will be relatively narrow and able to apply existing, well defined stan- 
dards. 213 

Some of the other programs are only variants of the modified procedure that 
have been used previously. 214 jn these, there is very little that is new. In the 
others, however, an interesting hybrid has been born that may have potential for 
substantial growth. 

Unfortunately, "arbitration" is a sufficiently pliable term that it can be used 
to describe virtually any process in which a third party makes a decision. It 
would be helpful if there could be concurrence on some minimal criteria a 
program must have before legitimately being called "arbitration" even in the 
administrative sense. A first cut at that might be: 



abbreviated discovery; 

parties' participation in the selection of the arbitrator; 

application of a pre-existing norm that is defined by either statute or a 
rule issued by the implementing agency; 

once norms are applied, discretion Is relatively narrow; 

strict time limits for decision; 

abbreviated decision, with a discussion of its factual and legal basis but 
no findings; 

limited review. Arbitration Act or designated as "arbitrary and capri- 
cious" but with a recognition of the nature of the process as defined In 



212. Some courts have said with respect to the PBGC program that the arbitra- 
tion is a form of "exhaustion" of remedies that is a precursor to a judicial 
determination. See, e.g. Peick v. Pension Benefit Guaranty Corp., 742 F.2d 
1247 (7th Cir. 1983). Even with this perspective, however, the arbitration is 
the assigned first step In the decision process. 

213. Superfund. Trustees of the Western Conference of Teamsters Pension Trust 
Fund V. Thompson Building Materials, Inc., 749 F. 2d 1396 (9th Cir. 1984). 



214. Edles, The Hearing Requirement in the 1980s, 31 Fed. Bar N and J 435 (1984). 



DISPUTE RESOLUTION PROCEDURES 217 

the criteria. 215 

Since these procedures are more limited than those provided by the APA, the 
process should be used only where the general criteria of arbitration are met. 216 

VII 
AGENCY OVERSIGHT OF PRIVATE DISPUTE RESOLUTION MECHANISM 

Two basic, structural forms of administrative arbitration emerge from the 
preceding analysis: (1) Programs that are explicitly within the agency itself and 
are used to resolve issues that would otherwise be decided under the customary 
agency processes. 217 (2) Programs that decide issues that arise because of agency 
action, or closely affiliated with it, but which are not actually a part of the 
agency;218 while distinct, they can be viewed in some ways as "associated" with 
the agency. A third model of administrative arbitration -- or, more accurately, 
administrative dispute resolution -- is where the agency supervises a dispute 
resolution mechanism ("DRM") that operates as a part of a private organization. 

A number of programs require, or permit, private organizations to establish a 
forum — a DRM -- for reviewing complaints or other issues that arise with 
respect to some particular activity. The circumstances are such that if such a 
program were not established, the agency itself might be required to hold a hear- 
ing to resolve the matters presented. Under these programs, the agency may 
specify minimal procedures that must be followed by the private organization219 
and it will review how well the process is working, but it does not typically sit 
in review of any individual decision. 

The Magnuson-Moss Warranty Act220 for example is administered by the 
Federal Trade Commission and encourages warrantors to establish procedures to 
resolve disputes concerning warranties fairly and expeditiously. 221 The Act 
requires the FTC to issue rules prescribing the minimum requirements for a DRM 
to qualify for special treatment. If such a program is established, a complaining 
consumer must first turn to it before proceeding to court or other remedy. 222 ^ 
DRM is required to be independent of warrantor; have procedures that minimize 



215. Thus, the court should assure itself that the arbitrator applied the right 
norms and performed in accordance with the requirements, but it would not 
attempt to force the arbitrator to replicate either a judicial or APA trial 
type hearing.- In either case, the benefits would be lost. 

216. See supra, at notes 63-67. 

217. MSPB, CFTC. 

218. FIFRA, Superfund, PBGC. 

219. For example, see discussion of Medicare procedures in text associated with 
notes 130-134, supra. 

220. 15 U.S.C. §§ 2301-2310. 

221. 15 U.S.C. § 

222. 15 C.F.R, § 703. 



218 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

burdens on the consumer; be financed by the warrantor; and be designed to 
achieve the basic goals of speed and fairness. 223 These programs can obviously 
be massively large. The Better Business Bureau, for example, operates the 

program for some of the auto companies and processes in excess of a quarter of a 
million disputes over automobile warranties per year. 224 

Programs such as these are caught in a dilemma. On the one hand the 
procedures used by the DRM must be sufficiently rigorous to provide confidence 
on the part of the users that they will receive a fair hearing. On the other 
hand, if the procedures are too stringent, there will be no incentive to establish 
them -- either because they would be too expensive to operate or because they 
would not offer an attractive alternative to other available m^ans of resolving the 
disputes. The tension between the two needs is clear and has been the subject of 
controversy over the years. 225 Several states have become dissatisfied with the 
process and have passed "Lemon Laws" going beyond the FTC's minimal proce- 
dures. 226 The Fxc has recently begun a negotiated rulemaking to review and 
revise Its rules. 227 

What Is needed for such a program Is to strike the delicate balance of 
providing an Incentive to establish a fair and effective program228 and an 
Incentive to use the process as opposed to others that may be available -- or to 
ensure that it Is Indeed fair and effective If those affected are forced to use It 
at least In the first Instance. 

The FTC also entered Into a consent decree with General Motors In settle- 
ment of Its allegation that GM had failed to notify customers of high failure rates 
of certain automobile components and that constituted a violation of Section 5 of 
the Federal Trade Commission Act. 229 instead of fighting the matter through a 
trial type hearing before the agency Itself and on through the courts, the 
Commission entered Into an agreement with GM whereby It would establish a DRM 
— the Better Business Bureau -- to determine whether a particular car is afflicted 
with the problems and what should be done to rectify the matter. Under the 
process, the BBB attempts to mediate ari agreement between the dealer and the 
customer and, falling satisfaction at that point, the Issue Is arbitrated. 

The process was criticized both on the grounds that a refund should be 



223. Appendix III. 

224. Testimony of Dean Determan at ACUS Hearings, supra, note 49. 

225. See, Rossi, Incentives for Warrantor Formation of Informal Dispute Settle- 
ment Mechanisms, 52 U.S.C. L. Rev. 235 (1978); Greenburg and Stanton, 
"Business Groups, Consumer Problems: The Contradiction of Trade Associa- 
tion Complaint Handling," in L. Nader, No Access to Law (1980) at 193. 

226. E.g. Connecticut. 

227. 51 Fed. Reg. 5205 (Feb. 12, 1986). 

228. One person who is familiar with the effect of the Magnuson-Moss Act's 
"exhaustion" requirement argued that It was often not an Incentive at all 
because It raised other forms of legal uncertainty and potential liability. 

229. In the Matter of General Motors Corporation , Dkt. No. 9145; see Appendix III. 



DISPUTE RESOLUTION PROCEDURES 219 

provided generally to all owners of the affected cars — whether or not they 
displayed any of the symptoms — and that the mediation entailed a burdensome 
extra step that would likely not prove effective since the customers had already 
tried and failed to reach agreement with the company. BBB has reported that 
nearly 90% of the cases in one test sample were settled by mediation, however. 230 

Another major example of an agency's oversight of private dispute resolution 
mechanisms is the Securities and Exchange Commission relationship with the 
DRM's of the self-regulatory organizations such as the exchanges and the 
National Association of Securities Dealers. 231 The Commission must approve 
particular rules that are adopted by the SRO's, some of which deal with their 
mechanisms for resolving issues that arise through their actions. The Commission 
deferred developing rules establishing a nationwide system for resolving disputes 
between broker-dealers and their customers when the industry organized the 
Securities Industry Conference on Arbitration which in turn drafted a Uniform 
Code of Arbitration. The code has been adopted by all ten of the SROs and the 
Commission. As of 1984, the SRO's had resolved almost 5,000 cases. 232 

Other examples of the private DRMs that are overseen by agencies are the 
Medicare procedures discussed above233 and medical ethics panels in hospitals. 234 

Supervised DRMs can provide particular, specific decisions that can serve in 
lieu of a general regulation. 235 \q a defense against what it fears may be more 
intrusive regulation, industry frequently argues that it will provide needed 
safeguards, and hence that additional regulation is not needed. Even if the 
industry developed a satisfactory rule, it will not be effective unless those 
affected by it have some opportunity to enforce it and that will likely require a 
means for resolving disputes that arising under the program. These would entail 
determining whether, in a particular instances, the rule was broken; whether it 
applies at all; whether it takes into account appropriate considerations; what 
damages someone sustained; and so on, raising all the issues that arise in an 
administrative program. One means of dealing with this situation is to encourage 
the self regulation, but require the establishment of a DRM to resolve the issues 
that will inevitably arise. Otherwise, either an agency or court will have to 
resolve the issues or the program will provide a privilege and not right, which of 



230. Testimony of Dean Determan at ACUS Hearings, supra note 49. The process 
has been controversial however. See, FTC, Consumer Group Clash over GM 
Program , Washington Post, p. E3 (October 25, 1985) which quotes the Center 
for Auto Safety as arguing "that the program is 'a disaster for consumers'." 
The Center alleged that the reviews of the program have not taken suffi- 
cient account of consumers who did not know about the program or who 
gave up before reaching a final resolution, 

231. See Appendix III for a fuller discussion. 

232. Katsoris, The Arbitration of a Public Securities Dispute , 53 Fordham L. Rev. 
279, 284 (1984). 

233. See text accompanying note 130-134 supra. 

234. See, e,g,, 50 Fed, Reg, 14,878 (1985) for regulations that implement the Child 
Abuse Amendments of 1984, P, L, 98-457. 

235. Harter, Dispute Resolution and Administrative Law, supra, note 76, 



220 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

course Is very different from the regulation sought to be forestalled. 

Several issues need to be considered and balanced when establishing a DRM 
that is overseen by an agency: What the incentives are to establish the program 
in the first place -- why would the private organization want to do it; what are 
the alternatives to doing so. Secondly, why would those affected, such as 
consumers, want to use it instead of some other process available. Or, if its use 
Is mandatory, then the agency will need to assure the public that minimally 
acceptable procedures will be followed. ^36 Finally, the agency needs to develop 
an enforcement mechanism by which it will oversee the execution of the proces- 
ses. That generally means the agency not an individual appeal, but that it will 
review how well the system is working overall to determine whether the minimal 
procedures are being met and whether the procedures should be modified. 



vni 

MINITRIALS 

Its creators called it an "information exchange", but a New York Times 
headline writer in August 1978 found "mini-trial" to be more descriptive and the 
name stuck. The writer was reporting the quick settlement procedure designed 
by lawyers to untangle years of litigation in a patent case involving TRW, Inc. 
and Telecredit, Inc. 237 

The minitrial is a flexible, voluntary alternative means for the resolution of 
complex disputes successfully used by businesses, governments, and various 
interest groups. The minitrial was developed with the guiding hand of the Center 
for Public Resources, a non-profit organization formed in 1979 by a group of gen- 
eral counsel of well known Fortune 500 corporations. The new procedure has 
made advances in commercial and consumer dispute contexts where reduction in 
litigation expense is a major goal, and the idea has begun to spread to a wider 
segment of the bar including the government contract field. NASA, the govern- 
ment pioneer in the program, used a minitrial procedure to settle a multimillion 
dollar satellite contract dispute with Spacecom and TRW. 238 T^e Justice Depart- 
ment has run a minitrial pilot program in certain military procurement cases, and 
the Army Corps of Engineers has established a pilot minitrial program in several 
of its regions. 

Minitrial Procedure. 

The minitrial, sometimes referred to as a mini-hearing to indicate the 
relatively informal nature of the process, is a highly abbreviated litigation process 
in which litigants present the heart of their case to senior officials of the other 
party who have authority to settle. "The primary purpose of the minitrial is to 



236. What should be minimally required must necessarily depend on the nature of 
the questions to be resolved. Thus, they process will depend on the subject 
matter. 

237. "Alternatives to the High Cost of Litigation", CPR, N.Y., N.Y., Special Issue 
1985, p. 3. 

238. 44 Federal Contracts Report 589. 



i 



DISPUTE RESOLUTION PROCEDURES 221 

set a stage and create a momentum for settlement. "^^^ Typically the process 
involves the "exchange of briefs or position papers with supporting documents, 
oral presentations of facts and law to senior officials of the opposing parties, 
some opportunity for questioning, and negotiation by the senior officials to 
attempt to settle the dispute. "240 ^^ advantage of the minitrial is that it focuses 
the attention and energy of executives on both sides of the dispute and forces 
them to participate directly in the negotiated settlement. Another desirable 
feature of the minitrial is its flexibility: the parties can tailor the essential 
elements of the procedure to fit the litigation at hand. 

Parties are motivated to adopt the minitrial procedure by several factors-- 
avoidance of high litigation costs, avoidance of adverse outcomes of litigation, 
the need to return employees supporting the litigation to more productive activi- 
ties, and the desire to maintain a reasonably cordial relationship between litigants 
who may wish to continue doing business together in the future. ^41 

The parties typically negotiate the groundrules at the outset and often 
suspend or curtail discovery. This would suggest to parties, who have an eye on 
the possibility of suspending normal litigation and attempting the minitrial, to 
make a careful schedule of depositions. 242 Because the minitrial may be elected 
before the end of discovery, the parties should depose those individuals whose 
testimony will have the most substantial impact. 243 

The minitrial is wholly voluntary so the parties must genuinely want to see 
it used as a means of settlement for it to succeed. 244 Obviously the threshold 
question for the parties to consider is whether the nature of their dispute lends 
itself to the mini-hearing process. 245 one of the developers of the minitrial 
offered the following observation on the decision of whether to use the process: 

It may not be appropriate where precedent-setting issues of law and 
witness credibility are the central issues and where the client has made 
a business determination to roll the dice. It can, however, be tailored 
to fit most large scale disputes involving mixed questions of law and 
fact, particularly where issues of science and technology are important. 
For most large, entrenched cases, the minitrial offers a better alter- 



239. Minitrial Successfully Resolves NASA-TRW Dispute , The Legal Times, Monday, 
September 6, 1982, p. 17. 

240. Parker, Douglas M. and Phillip L. Radoff, The Mini-Hearing; An Alternative 
to Protracted Litigation of Factually Complex Disputes, 38 The Business 
Lawyer 35, November 1982. 

241. Minitrial supra 233 at 17. 

242. Id. 

243. "Alternatives to the High Cost of Litigation", CPR, N.Y., N.Y., Special Issue 
1985, p. 3. 

244. Parker and Radoff, supra note 240 at 42. 

245. Olson, Dispute Resolution: An Alternative for Large Case Litigation , 6 
A.B.A. Litigation Sec. J. 22 (1980). cited in Parker and Radoff, supra note 
240 at 42. 



222 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

native to the more common practice of one side and then the other 
occasionally tossing out a settlement offer. 246 

Two obviously related questions to consider are whether one side will have 
gained a tactical advantage if settlement Is not reached and what point in the 
litigation process will be the most appropriate to conduct the minltrial.247 
Parties should consider that despite a failure in settlement following the minitrial, 
the process itself aids the parties in preparing and focusing the issues of their 
cases for future full-blown litigation. 

If the parties decide to use the minitrial, an important consideration is 
whether to use a neutral advisor to moderate the discussion. 248 Most, but not 
all, minitrials employ a neutral advisor with special expertise (often a retired 
Judge) to "supervise the discussion and to furnish the parties with a nonbinding 
evaluation of the most likely outcome of the dispute were it to wind up In 
court, "249 j^ cases of highly technical disputes, some parties have found that the 
Introduction of a neutral advisor causes additional expense and possible delay 
because the advisor must become sufficiently educated. 250 j^ the NASA case 
explained below, for example, the parties never seriously contemplated using a 
neutral advisor. ^^1 

Relatively short written briefs discussing the applicable facts and law are 
usually exchanged prior to the minitrial. 252 More comprehensive briefs are 
sometimes helpful or necessary In narrowing the issues In advance of oral 
presentations. 253 j^ the NASA case, for example, the briefs were rather lengthy 
and also were followed by a simultaneous exchange of written questions to be 
responded to at oral presentation. 254 

The hearing Itself usually lasts no more than two days for the parties to 
state their cases (excluding extraneous Issues), offer evidence for their positions, 
and field questions. 255 presentations can be made by lawyers, technical experts. 



246. Parker and Radoff, supra note 240 at 42. 

247. Id. p. 35. 

248. Id. p. 43. 

249. "Alternatives to the High Cost of Litigation", CPR, N.Y., N.Y., Special Issue 
1985, p. 3. 

250. Parker and Radoff, supra note 240 at 43. 

251. Id. 

252. Id. 

253. Id. 

254. Minitrial supra note 239 at 13. 

255. Alternatives to the High Cost of Litigation , CPR, N.Y., N.Y., Special Issue 
1985, p. 3. 



DISPUTE RESOLUTION PROCEDURES 223 

or a combination of both. 256 ^t the conclusion of the hearing, the negotiating 
officers go off on their own to settle the dispute, with legal advisors standing by 
for consultation. If they reach an impasse, and have proceeded before a neutral 
advisor, the parties can request an advisory opinion on the likely outcome. The 
advisory opinion often acts as a catalyst towards settlement. 257 with or without 
a neutral advisor, any deadline set by the parties can contribute to lending a 
sense of urgency to resolving the dispute. 258 



Use by Government Agencies. 

The growing movement in corporate and consumer disputes to save time, 
money, and judicial resources through alternative dispute resolution techniques — 
such as minitrials -- has slowly reached the government setting. 259 Exploration 
of the new technique should be helpful since the government has experienced the 
same rising litigation costs and interminable court delays as private parties. 
Several perceived statutory and practical obstacles have impeded the government 
in using creative dispute resolution methods, however. The minitrial may be 
particularly well suited to overcome these obstacles. 260 

One obstacle which makes government contract disputes distinct from 
commercial litigation is the elaborate disputes resolving statutory procedure 
mandated by the Contract Disputes Act of 1978.261 The statute applies to all 
contracts entered into after March 1, 1979. A key provision of the statute 
mandates that all government contracts include dispute clauses which set forth 
procedures by which disagreements relating to the contract must be resolved. 262 
The procedure requires the government to make a final written decision concern- 
ing the disagreement with the contractor including all the facts and legal 
conclusions which led the government to deny the contractor's claim. 263 Upon 
receipt of the government's final decision, the contractor has three options: (1) 
acquiesce; (2) appeal the decision to an agency board of contract appeals; or (3) 
sue in the U.S. Claims Court. 264 

Whether these statutory procedures are exclusive is a question which raises 



256. Parker and Radoff, supra note 240 at 43. 

257. Cong. Rec. S14707 (November 1, 1985). 

258. Parker and Radoff, supra note 240 at 44. 

259. Crowell and Moring Discussion Paper, Alternative Resolution of Government 
Contract Disputes, p. 1. 

260. Minitrial supra note 239 at 21. 

261. 41 U.S.C. §§ 601-613 (Supp. IV 1980). 

262. Minitrial supra note 239 at 19. 

263. Id. 

264. Id. 



224 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

an Impediment to the government's use of the minitrlal technique. 265 pQp 
example, In Davis and Moore , ^66 ^^g Interior Board of Contract Appeals held that 
the government cannot submit to binding arbitration because of conflict with the 
statutory procedures. ^67 jy^^ government's authority to settle and to devise 
means of settling, however, has never been doubted because in fact a basic 
purpose of the Contract Disputes Act was to promote more efficient resolutions of 
disputes. 268 

A second serious obstacle facing government use of expedited settlement is 
"the natural inclination of agency officials to follow the book, in resolving 
disputes, thereby theoretically avoiding congressional and public criticism. "269 a 
plethora of organizations outside the agency review and second-guess any 
settlement. Potential reviewers and possible critics Include oversight committees 
of Congress, audit teams from the General Accounting Office, and the agency 
Inspectors general, 270 ^g well as the general public. The use of mlnltrlals may 
actually ease this problem, however. The process requires a written record 
clearly documenting the issues of settlement, potential litigation risks are clearly 
described by the legal positions set forth in the briefs, and the formality of the 
procedure Itself may lessen criticism. "271 

A third perceived constraint unique to the federal contracts context is the 
question of settlement authority. Federal agencies have a rigid chain of command 
and settlements must often be approved by the legal, financial, procurement 
policy, and technical divisions of an agency. 272 Tentative settlements are often 
upset by subsequent internal agency review. The minitrlal procedure may also 
obviate much of this problem. In preparation for the minitrlal, the government is 
forced to define the authority of the negotiation and the acceptable negotiating 
position. The advance approval and "written authorization from the head of the 
agency, empowering the representative on behalf of the agency to reach a 
settlement, reduces the opportunities for overturning the settlement. "273 

Finally, a related problem for the government is the question of settlement 
funding requirements. 274 ^ negotiating officer for the agency obviously cannot 
ultimately make settlement without the funds to cover it. Minitrlal requirements 



265. Id. 

266. IBCA No. 1308, 81-2 BCA 91 15,418. 

267. Minitrlal supra note 239 at 21. 

268. jd. S. Rep. No. 3173. 95th Cong., 2nd Sess. 119781. 

269. Crowell and Morlng, p. 1. 

270. Minitrlal Successfully Resolves NASA-TRW Dispute , The Legal Times, Monday, 
September 6, 1982, p. 21. 

271. jd. 

272. jd. 

273. jd. 

274. Crowell and Morlng, supra note 259 at 6. 



DISPUTE RESOLUTION PROCEDURES 225 

in some ways relieve these problems by involving senior officials who have the 
authority to approve "re-allotments". 275 Re-allotments can be made within the 
agency to cover the financial needs for a particular settlement. 

Despite the putative obstacles mentioned above, the government has already 
begun exploring alternative dispute resolution ("ADR") techniques, such as 
minitrials, because of several factors relating to litigation, some unique to 
government and some particular to all litigants. 

The most obvious catalyst for exploration of alternative resolution techniques 
is the rising cost of litigation and the court delays which face all private parties 
and with perhaps even greater force the government. 276 Disputes between 
agencies and their suppliers has been the natural result of an increase of federal 
procurement spending. 277 jn fiscal year 1982, for example, 1,273 cases were filed 
with the Armed Services Board ("ASBCA"), the largest administrative board of 
contract appeals, while only 974 cases were filed the previous year. 278 Only 95 
of the 1,594 pending cases in 1982 were being processed under optional expedited 
procedures. 279 Although the administrative appeals boards were designed as a 
streamlined alternative to court litigation, the costs are still substantial because 
of the formal procedures adopted by the boards. 280 Minitrials have resulted in 
substantial savings for the parties. In the NASA case, which was the first 
minitrial used in the context of government procurement, one estimate suggested 
that the savings "were probably more than $1 million in legal fees alone. "281 

Another factor making the minitrial particularly attractive to the government 
is related to the required procedures of the Contract Dispute Act of 1978 itself. 
The required disputes clause in government contracts requires that federal 
suppliers continue performance, notwithstanding a dispute with the government. 
The contractor may not stop work and immediately challenge in court an agency 
order or contract interpretation. 282 Another mandatory clause in all government 
contracts, the "changes clause", also allows the government to insist upon changes 
to the contract during performance. 283 Those allowable government changes 
would of course be considered breaches of contract in a commercial setting. 284 
In exchange for those two conditional clauses, the government must pay a fair 



275. Minitrial supra note 239 at 21. 

276. Crowell and Moring, supra note 259 at 2. 

277. Id. 

278. Id. 

279. Id. 

280. Id., at 3. 

281. Eric D. Green, Boston University Law School Professor in 44 Federal 
Contracts Report 591, September 23, 1985. 

282. Crowell and Moring, supra note 259 at 4. 

283. Id. 

284. Id. 



226 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

amount for additional work. 285 Problems arise, however, when the government 
does not consider one of its directions as being a "change" in the contract. The 
contractor must continue to perform and leave for later the question of who will 
bear costs. '^^^ An efficient, expedited resolution of the dispute by minltrial 
settlement will lessen the adversarial roles between the government and its sup- 
plier -- "a phenomenon that serves the ongoing business relationship of the 
parties to government contracts. "287 

When and for Which Cases, Should the Government Consider Using Minitrials? 

In Its pilot program for using minltrial techniques to resolve disputes, the 
Justice Department has directed government attorneys that cases selected for 
minltrial should be at an early stage of litigation. 288 jy^^ cost savings of a 
minltrial held after discovery has already been completed may not be signifi- 
cant. 289 In addition, the case should probably involve more than $250,000 to 
justify expenditure of at least a full day's time of high-level company executives 
and government officials. 290 

The minltrial technique lends itself well to cases Involving highly technical 
concepts and disputes involving mixed questions of law and fact. 291 The NASA 
case was a good candidate to test the minltrial for this reason. The government 
also may wish to consider using the minltrial method in cases Involving classified 
defense contracts. The informal settlement can be conducted without an eviden- 
tiary hearing in open court that might be harmful to the national security. 292 

The minltrial Is likely less appropriate where witness credibility Is a major 
factor. The technique is also probably not justified in cases where questions of 
law can quickly be resolved through summary judgment. 293 Finally, the minltrial 
would not be extremely effective for the government in litigation undertaken to 
Implement policy. 294 



285. Id. 

286. W. 

287. Minltrial Successfully Resolves NASA-TRW Dispute , The Legal Times, Monday, 
September 6, 1982, p. 19. 

288. 44 Federal Contracts Report 591. 

289. Id., at 589. 

290. Id., at 590. 

291. jd. 

292. Crowell and Moring, supra note 259 at 8. 

293. jd. 

294. Oliver, Dale E., Crowell and Moring, Alternative Dispute Resolution In 
Government Litigation ; Remarks before the First Judicial Conference of the 
United States Court of Appeals for the Federal Circuit, p. 1. 



DISPUTE RESOLUTION PROCEDURES 227 

The following is a brief review of two government cases successfully 
resolved through use of minitrial techniques. 



NASA Minitrial. 

The first reported use of the minitrial technique to resolve a government 
contracts dispute was in 1982 when NASA, Space Communications Co. (Spacecom 
-- prime contractor), and TRW, Inc. (TRW — the subcontractor) settled a 
multi- million dollar technical dispute. 295 jhe dispute involved one of NASA's 
communications satellite programs. 

Nature of the Dispute . In December 1976, NASA awarded a major satellite 
contract to Spacecom for the production of a tracking and data relay satellite 
system (TDRSS) and related services to be provided over a ten year period. 296 
The satellites were to be deployed in orbit by a space shuttle and provide a 
telecommunications link to an earth station. 297 jhe contract had an initial price 
of $786 million. 298 

TRW, Inc., the principal subcontractor, was responsible for providing system 
engineering, building the communication satellites and providing the necessary 
software. 299 

By the fall of 1981, the commencement of the TDRSS services had been 
rescheduled because of delays in production of the space shuttle; the contract 
price had nearly doubled because of the delays and program changes; and several 
contract disputes had arisen between Spacecom and NASA. 300 fhe disputes, 
ultimately resolved by the minitrial, arose when NASA issued two letters of 
direction to the contractors in early 1979. The letters sought to obtain for NASA 
certain capabilities that it believed were within the scope of the contract. 301 
Spacecom and TRW maintained that the instructions constituted new work which 
entitled them to increased compensation. 302 Spacecom and TRW appealed the 
final decision of the contracting officer to the NASA Board of Contract Appeals. 
The consolidated appeal was one of the largest ever filed with the Board. 303 
These appeals commenced the litigation. 

Scope of Litigation. The litigation involved a series of complex issues 



295. 44 FCR 590. 

296. Minitrial supra note 239 at 13. 

297. 44 FCR 590. 

298. Parker and Radoff, supra note 240 at 37. 

299. Minitrial supra note 239 at 13. 

300. Parker and Radoff, supra note 240 at 37. 

301. 44 FCR 596. 

302. Minitrial supra note 239 at 13. 

303. 44 FCR 596. 



228 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

relating to the Interpretation of the TDRSS performance specification In a variety 
of highly technical respects. 304 "The merits of the Issues involved Intricate 
questions of computer capability, electronics, and the laws of orbital mechanics, 
as well as traditional questions of contract interpretation. "305 

The complaint and answers were filed in September 1979 and February 1980, 
respectively. 306 Shortly after discovery began, the parties suspended the pro- 
ceedings for three months to pursue traditional settlement negotiations. 307 
Settlement failed. The parties renewed litigation and engaged in massive docu- 
ment discovery Involving the reproduction of approximately 33,000 pages of 
government files and 72,000 pages of the contractors' files. 308 

Depositions commenced In the summer of 1981.309 Although the contractors 
sought 11 depositions and the government sought 43, only 5 depositions actually 
took place. 310 By September, the highly technical examinations of the witnesses 
"consumed 3100 pages of transcript. "311 The widening scope of discovery required 
the Board to push back the hearing date several times and it was estimated that 
trial was still at least a year away. 312 

In the fall of 1981, Spacecom approached NASA with the suggestion to 
undertake settlement discussion again. The parties agreed on a minltrial after 
certain preconditions were set by the parties: (1) the contractors would submit a 
cost proposal with a breakdown of the six major issues of appeal; (2) each side 
would give written authority to settle to an appointed negotiator; (3) deadlines 
and rules of conduct would be agreed upon; and (4) discovery would be suspended 
during the minltrial. 313 

Motivations to use the MInitrial. First, both parties were concerned with 
costs. They had already found It necessary to conduct detailed discovery and 
anticipated substantial additional discovery. The parties had proposed calling for 
the depositions of forty-five additional government and contractor witnesses over 
the next ten months. 314 



304. Parker and Radoff, supra note 240 at 37. 

305. Id., p. 38. 

306. W. 

307. Minltrial supra note 239 at 13. 

308. Parker and Radoff, supra note 240at 38. 

309. Id. 

310. Minltrial supra note 256 at 13. 

311. Parker and Radoff, supra note 240, at 38. 

312. Minltrial supra note 239 at 13. 

313. M., p. 13. 

314. Parker and Radoff, supra note 240 at 38. 



DISPUTE RESOLUTION PROCEDURES 229 

Second, the parties were motivated to tighten the schedule. A trial date 
was not even in sight with delays attributable to the complexities of the case, 
problems in coordination between the prime and subcontractor, the difficulty of 
securing people for litigation who were also needed in the TDRSS program, and 
the shortage of people allocated to the case by the government. 315 

A third concern of both NASA and the contractor was the uncertainty of 
result. Both parties were aware that the difficulty of making a clear, comprehen- 
sive and persuasive presentation of such complex issues created an unusual 
uncertainty in the outcome. 316 

Another motivation for the minitrial was the parties' need for continued 
cooperation. Litigation can strain business relations between parties. In this 
case, the parties were required to continue working together to deploy the satell- 
ite successfully, a national asset. They also wanted to release key personnel from 
the litigation process to resume channelling their energies into the program. 317 

Finally, the parties felt the need to address the merits and involve senior 
officials. Spacecom realized that previous settlement discussions had not ad- 
dressed the merits of the issues nor involved face-to-face meetings of senior 
management. 318 it felt that NASA's willingness to invest such time and money 
into discovery suggested that NASA was persuaded that the government's case was 
meritorious. 319 The contractors felt that a settlement could only be reached if, 
through a minitrial, senior management of NASA was exposed to the contractor's 
best case and both parties were able to address the merits. 320 

The Procedure . Before proceeding, the parties agreed that: 

• Litigation would be stayed during the minitrial, 321 but would resume if 
no settlement were reached. 

• The contractors would submit a formal claim covering cost of perfor- 
mance and proposed allocation of cost of each legal issue. 322 

• The parties would simultaneously exchange briefs setting forth their 
factual and legal positions. All cited documents were to be included in 



315. Crowell and Moring, supra note 259 at 8. 

316. Parker and Radoff, supra note 240 at 39. 

317. Id. 

318. Id. 

319. Id. 

320. Id. 

321. Id., p. 40. 

322. Id. 



230 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

appendices. 323 no reply briefs would be filed. 

• Shortly after the briefs were exchanged, each party would submit 
questions to be addressed by the other during Its oral presentation. ^24 

• The trial was to be one day. Each side was to have three hours to 
make a presentation and could use whatever combination of lawyers and 
engineers It thought appropriate In making the presentations. ^25 

• Presentations were to be made to senior officials representing each 
party. An associate administrator of NASA and the director of Goddard 
Space Flight Center for NASA; a VP of TRW and the president of 
Spacecom. for the contractors. Only senior officials would ask 
questions. 326 

• Settlement negotiations would then begin. 

In the actual minitrial, the oral presentations were made exclusively by 
lawyers. 327 Also, the parties chose not to use a neutral advisor because of the 
complex technical issues in dispute. 328 

Settlement negotiations began the day after the hearing "behind closed 
doors" at NASA headquarters. 329 Only the four principal negotiators directly 
participated in the negotiations but had advisors and legal counsel stand by to 
discuss positions. 330 jy^^ parties had agreed to a groundrule of limiting the 
settlement negotiations to a single day but decided that an additional day was 
justified by the progress made. The parties settled after their second day of face 
to face meetings and reached agreement on the claim as well as unrelated dis- 
putes. 331 All claims and related issues amounted to well over $100 million. 332 

Army Corps of Engineers Use of the Minitrial 

In the last two years, the Corps of Engineers has used the minitrial 



323. 21' NASA submitted a 64 page brief with a 43 document appendix, while the 
contractor's brief consisted of 81 pages and an appendix of 79 documents. 

324. Minitrial supra note 239 at 13. 

325. W. 

326. jd. 

327. Id. 

328. Crowell and Moring, p. 10. 

329. Parker and Radoff, p. 41. 

330. Minitrial supra note 239 at 17. 

331. jd. 

332. Id. 



DISPUTE RESOLUTION PROCEDURES 231 

procedure twice to resolve construction contract claims. ^^^ Spokesmen for the 
Corps have said that the type of case most suited for a minitrial is one involving 
a "highly complex factual dispute in which the contractor's arguments have some 
merit. "334 fhe Corps looks for cases in which there is a possibility that a board 
of contract appeals will sustain the contractor's position where there is room for 
the government to settle. 335 

Industrial Contractors . The Corps first used the minitrial to reach 

settlement on a $630,000 construction contract claim, 336 fhe claim was made by 
Industrial Contractors, Inc. that the government had "improperly accelerated 
performance on its construction contract. "337 jhe parties agreed to use a mini- 
trial. The contractor's president and the Corps' division engineer each presented 
his claim in three and one half hours. 338 Following an appraisal of their cases 
by a neutral advisor, former Claims Court Judge Louis Spector, the parties settled 
after 12 hours of negotiation. 339 

Tenn-Tom . The second case in which the Corps successfully used the 
minitrial technique to resolve a dispute involved a $61 million construction claim 
by Tenn-Tom Construction. 340 The Corps awarded a contract to construct part of 
the Tennessee-Tombigbee Waterway, to Tenn-Tom, a joint venture of Morrison-- 
Knudsen Co., Brown and Root, Inc., and Martin Eby Construction Co. 341 The 
contract was for excavation of 95 million cubic yards of earth. 342 The dispute 
arose when the contractor sought a $44 million equitable adjustment based on 
alleged differing site conditions. The contractor had experienced performance 
difficulties because of drainage problems on site. 343 After receiving written 
denial of the claim by the contracting officer, the joint venture appealed to the 
Corps of Engineers Board of Contract Appeals, 344 increasing the claim to $61 
million due to interest. 

The parties agreed to a minitrial and chose Professor Ralph Nash, a GW 



333. 44 FCR 502; 43 FCR 257. 

334. 44 FCR 502. 

335. Id., p. 503. 

336. 43 FCR 257 in W^ 

337. Id. 

338. jd. 

339. Id. 



340. In Re Tenn-Tom Construction , memorandum of settlement agreement, 8/23/85. 
44 FCR 502. 

341. 44 FCR 500. 

342. jd. 

343. Id. 

344. Id. 



232 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

professor, as a "neutral advisor. "345 xhe trial was held In Cincinnati on June 
12-14, 1985.346 jhe principal officers for the parties were J. K. Lemley, Senior 
Vice President of Morrison- Knudsen, for the contractors, and Division Engineer 
Brig. Gen. Peter J. Offrlnger, for the Corps. 347 xhe parties presented their 
cases on consecutive days, with a third day devoted to presentation of evidence 
concerning quantum and for remaining questions. 348 gy agreement, the parties 
reconvened on June 27, for presentation of further evidence and more questions. 
They settled the next day. 349 xhe government agreed to pay Tenn-Tom $17.25 
million in exchange for a release of all prime contractor and subcontractor claims 
under the contract. 350 



IX 
SETTLEMENT TECHNIQUES 

Agencies use a variety of techniques that are less structured and less formal 
than minitrials to encourage the settlement of contested issues. The unifying 
principle of all the processes Is that the parties make the decision themselves 
through a negotiated agreement. That is, these procedures are unlike arbitra- 
tion33l where someone makes a decision and imposes it on the parties. 



Need for Structure to Facilitate Settlements 

Settlements happen all the time. Most, no doubt, occur by "doing what 
comes naturally." While successful in resolving many cases, an ad hoc approach 
does not recognize settlement as a specific process that can result in both more 
and better settlements. 352 Explicit recognition of their potential by the devel- 
opment of procedures to induce them in appropriate situations353 ^^d to provide 



345. Id. at 503. 

346. Id. 

347. ]d. 

348. jd. 

349. jd. 

350. Id. 

351. To a very real extent, however, non-binding arbitration Is a settlement 
techniques since the parties return the authority to make the final decision 
after award. 

352. Testimony of Erica Dolgin of Environmental Protection Agency at ACUS 
Hearing supra note 49. Ms. Dolgin observed that settlements have a life 
span -- a beginning, a middle, and an end -- and that the procedures and 
skills required for each phase may differ. 

353. While It should be unnecessary to point out, but given the enormous 
attention paid recently to managing dockets and using ADR techniques as a 
means of reducing the backlog of trials, it bears emphasizing that not all 

(continued...) 



DISPUTE RESOLUTION PROCEDURES 233 

for the participation of those who would be affected can help agencies handle 
their caseloads and make fully satisfactory decisions with fewer resources than 
would a more formal process. It is, therefore, helpful to establish procedures to 
enhance the settlement process. Moreover, settlement procedures can help 
alleviate problems peculiar to the government in settling cases. 354 

As in any bureaucracy, the distance between those on the line and those 
with decisional authority can be a major inhibition to negotiating a settlement. 
The employee who is handling a particular matter may lack guidance as to the 
agency's policies concerning settlement, and hence may be reluctant to engage in 
discussions simply because he or she is unclear whether the agency has the power 
to settle^SS ©r as to what would be acceptable. 356 Qr, as a result of the same 



3 5 3. (...continued) 

cases can or should be settled. The thesis of this paper is that trials are 
one, but only one, means of making decisions, and that other techniques may 
be more appropriate in particular circumstances. ADR techniques are a 
positive means of resolving important issues, not a second best alternative to 
the "real thing." 

Formal decisions become public goods that guide future conduct and provide 
a means of ensuring that the public welfare is achieved. For example, if 
someone was the victim of severe discrimination, the public may demand a 
full vindication of the violation of the public's standards, even though the 
individual may be willing to settle for less. There is, therefore, some public 
policy against settlement, although its full reach and reason is not always 
clear. 

The result, however, is that agencies and parties should always consider the 
matter in perspective and recognize that some issues should be resolved in a 
formal, public manner because they involve issues transcending the immediate 
parties. See Edwards, Fiss, and Schoenbrod, supra note 66. On the other 
hand, there seems to be no particular reason for believing a federal judge is 
the only one able to pronounce justice in such cases and that properly 
structured and supervised settlements may often do a better job of rectifying 
the problem. 

354. Rosin, EPA Settlements of Administrative Litigation, 12 Ecology L. Q. 363 (1985). 

355. Former Attjorney General William French Smith observed, 

government lawyers sometimes are reluctant to use alternative 
means of dispute resolution because it is not clear whether Con- 
gress has authorized such means. Where Congress has, it still may 
be unclear who in the agency has power to approve their use or 
how an agency pays for the nonjudicial forum. 

Smith, Alternative Means of Dispute Resolution; Practices and Possibilities in 
the Federal Government, 1984 Mo. J. of Dis. Res. 9, 21. 

356. Richard Robinson, Director, Legal Enforcement Policy Division, Environmental 
Protection Agency, testified at the ACUS Hearings that settlement techniques 
are not used frequently because there are too many layers involved in 
getting permission to use a new approach and, even if granted, the official 

(continued...) 



234 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

phenomenon, a proposed settlement may be subjected to multiple layers of review 
within the agency. ^^^ In that case, those with whom the agency Is negotiating 
may be reluctant to be forthcoming since the tentative agreement may be upset as 
it wends Its way through the agency. People negotiate to reach a binding 
resolution of the controversy. Hence, if the agreement that was crafted after 
days of pressing discussions does not have a fairly good chance of being accepted, 
parties have a significantly lessened Incentive to bargain. 

These problems with settlement can be addressed by providing those who 
would normally negotiate with the public with guidelines as to the agency's 
policies concerning settlements. ^^^ Another means of addressing similar problems 
is for the agency to make lines of authority clear and provide a means for 
Involving policy-level officials in the decisions as they mature, so that once the 
agreement is struck there is a reasonable likelihood that It will be upheld. 

Another inhibition to settlements -- one certainly not limited to government 
-- is that the parties become overly convinced of the strength of their respective 
cases. Since each believes he or she has a winner, and hence a high BATNA, 
they also see little to be gained in settling, unless of course the other side sees 
the light and capitulates. That is not conducive to settlement. Thus, another aid 
in the settlement process is to provide some sort of "reality check" on all parties. 
This is some means of helping a party assess the strength of its case in a rela- 
tively honest, straight forward way so that they can put its settlement potential 
into perspective. The minltrial, for example, is designed to use a neutral advisor 
who will render an Informal, non-binding opinion should the executives fail to 
negotiate an agreement. ^^^ 

Yet another problem facing government officials in settling cases is debili- 
tating second guessing. ^^0 Direct negotiation among those affected customarily 



3 56. (...continued) 

is likely to feel he or she will not receive enough credit for using a new 
approach. Thus, it is easier and safer to stick with traditional litigation. 
Indeed the government has never used ADR in an enforcement case. 

357. See discussion supra at note 272. 

358. Testimony of Kay Mc Murray, Director, Federal Mediation and Conciliation 
Service, at ACUS Hearings, supra note 49. 

The Attorney General recently issued guidelines to executive branch agencies 
concerning settlements. It cautions agencies against yielding future discre- 
tion in settlements and provides examples of the types of settlements the 
Department of Justice will oppose. While perhaps negative in tone, it does 
provide agencies with guidance they can take into account when initiating 
settlement discussions. It is far better to know of the limitations at the 
early stages of negotiation than having a fully developed tentative agreement 
knocked down. 



359. See discussion supra at note 33. 

360. Those who manage the government's litigation may also be reluctant to use 
informal dispute resolution processes because of a fear that they will be 

(continued...) 



DISPUTE RESOLUTION PROCEDURES 235 

relies on the parties' self interest for its integrity; indeed, the ability of those 
affected to actually make the decision is one of the most attractive aspects of 
direct negotiations. Thus, whether or not the agreement is a "good deal" for any 
one party can be judged by comparing it to that party's goals and what might 
have occurred if some other process for reaching a decision were followed. The 
difficulty with using direct negotiations when the government is a party is that 
the government's own goals may sometimes be unclear. Thus, for example, it may 
not be clear in the abstract whether a settlement was wise under the circumstan- 
ces because the government's case was weak, or the official wanted to achieve 
some other end,361 or whether the settlement inexplicably gave too much away. 
The potential for second guessing an official can have a debilitating effect on 
negotiations in some controversial areas. In that case, it may be that the agency 
would want to establish a panel of senior officials or a group of neutral ad- 
visers, ^^2 publish the settlement in the Federal Register for comment, ^^^ or some 
other means to ensure the integrity of the decision and to curtail pernicious 
second guessing. 



Overview of Technlque8364 

The Environmental Protection Agency drafted, but has not published rules to 
encourage the negotiation of test rules under the Toxic Substances Control Act by 
providing procedures leading to a "consent agreement" that will have the effect of 
an EPA rule.^^^ The proposal provides "EPA intends to use enforceable consent 
agreements to accomplish testing where a consensus exists among EPA, affected 
manufacturers and/ or processors, and interested members of the public concerning 



360. (...continued) 

criticized. For certain issues, such as public health and safety, the percep- 
tion remains with some that private, informal hearings are inadequate, and 
that public officials who allow such hearings may be abusing their power. 

Smith, supra note 355, at 21. 

361. There is always the possibility that someone will attack a settlement as 
motivated by the government official's seeking beneficial employment or 
otherwise currying the favor of the one with whom he or she is settling. 

362. See, Railwa,y Labor Act, § 2, Ninth; Switchmen's Union v. National Mediation 
Board , 320 U.S. 297 (1943). 

363. The Department of Justice and the Federal Trade Commission publish notices 
concerning proposed mergers. 

In addition to providing information for the agency's consideration, the 
publication can also help diminish allegations of backroom deals since the 
world at large will know that the decision is being made and what its 
contours are. 

364. See Appendix I for a survey of settlement techniques used by administrative 
agencies. 

365. Draft of August 7, 1985 of a notice of proposed rulemaking. 



236 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

the need for and scope of testing. "366 procedures have also been recommended 
for using negotiation to resolve complex Superfund matters. 367 Ep\ has Issued 
guidelines for settling enforcement actions. 368 

The Federal Energy Regulatory Commission uses as "settlement Judge" to help 
the parties settle a case.3o9 The Chief Judge has the authority to designate an 
ALJ who is not assigned to a case to meet with the parties In an effort to clarify 
and narrow the issue and to see if they can settle the matter. The settlement 
judge does not have the authority to Impose a decision, and because the judge is 
not the one who will try the case, the parties are likely to feel freer to be more 
direct and open In attempting to reconcile their differences. One judge indicated 
that he was able to review the file and provide a fairly accurate appraisal of the 
case for certain types of matters, and that had a salutary effect on the parties 
by putting their case into perspective. To an extent, the settlement judge acts a 
bit like a mediator and a bit like the neutral adviser in a mlnitrial by giving his 
reaction to the case. 

Agencies have also established a number of explicit mediation programs. The 
Secretary of Commerce mediates disputes under the Coastal Zone Management Act 
between a federal agency and the affected costal zone state. 370 The Office of 
Ocean and Coastal Resources Management mediates several disputes per year 
between state agencies and federally licensed activities. Complaints over age 
discrimination are mediated by the Federal Mediation and Conciliation Service, 371 
and the Equal Employment Opportunity Commission seeks to reconcile differences 
over unlawful employment practices. 372 The Grant Appeals Board of the Depart- 
ment of Health and Human Services provides a "two track approach," one of 
which is mediation; this process Is the subject of a separate, comprehensive study 
by the Administrative Conference. 

The criteria for determining whether an Issue Is likely to be resolved 
through negotiation were developed In ACUS Recommendation 82-4.373 while the 
recommendation itself focused solely on the prospects for negotiating regulations, 
the criteria are applicable to issues of public policy generally. Briefly stated, the 
criteria for deciding when a matter would lend Itself to a negotiated solution 



366. Id. 

367. ACUS Rec. 84-4; Anderson, Negotiation and Informal Agency Action; The 
Case of Superfund , 1985 Duke L. J. 261 (1985). 

368. See, e.g., 50 Fed. Reg. 5034 (1985). 

369. Appendix I. 

370. Appendix I. 

371. For a discussion of FMCS's non-labor activities generally, see Barrett, The 
FMCS Contribution to Non-labor Dispute Resolution , Monthly Labor Review 
31 (August 1985). 

372. 29 CFR § 1601.24. 

373. Harter, Negotiating Regulations, supra note 1, Perrltt, Negotiated Rulemaking 
In Practice, 5 J. Pol. Ana. & Mgt. 482 (1986). 



DISPUTE RESOLUTION PROCEDURES 237 



are: 



.374 



• The number of interests that must participate in the discus- 
sions at any one time is limited to approximately 15-25; 
others can be accommodated by means of "teams" or cau- 
cuses". 

• Each interest is sufficiently organized that individuals can be 
selected to represent it during negotiations, or several 
individuals together can span the range of interests. 

• The issues are mature and ripe for decision; that is, they are 
sufficiently crystallized that the parties can focus on them 
directly. 

• There is a realistic deadline; this may be an agency commit- 
ment to move forward on its own if sufficient progress has 
not been made in the negotiations. 

• No party will have to compromise an issue fundamental to its 
very existence. 

• The outcome is genuinely in doubt, in that no party can 
achieve its will without incurring an unacceptable sanction 
from some other party; thus, the parties have reached a 
stalemate or an impasse. 

• The parties will commit themselves to negotiating in good 
faith (which is not to say that they have to agree to yield 
whatever other tools they have at their disposal to achieve 
their ends). 

Many of these provisions have direct applicability to deciding whether it would be 
appropriate to settle a pending matter. 



X 

CONCLUSION: WHERE DO WE GO FROM HERE? 

A prestigious panel of the American Bar Association, following an extensive 
study, found severe shortcomings in the administrative process: 

We share the general view that many administrative procedures are too 
slow, costly and cumbersome. As a result, vital economic interests 
concerned with capital formation, plant modernization and business 
expansion are severely handicapped, and reforms necessary for the 
protection of workers and consumers are too long postponed. These 
delays and excessive costs have resulted, in considerable part, from the 
fact that administrative procedures, initially developed as a safeguard 



374. Harter, Regulatory Negotiation; An Overview , Dispute Resolution Forum, (Jan, 
1986) at 4. See also, Cormick, The "Theory" and Practice of Environmental 
Mediation , 2 Envtl Prof. 24 (1980); Susskind & Weinstein, Toward a Theory 
of Environmental Dispute Resolution , 9 B.C. Envtl Aff. L Rev. 311 (1980); 
Raiffa, The Art and Science of Negotiation (1982). 



238 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

against the threat of regulatory abuse, have come to mimic the Judicial 
process, with inadequate regard for the flexibility available under 
existing statutes. Improved procedures will serve all citizens, both as 
consumers and producers. ^"^^ 

Former Attorney General William French Smith echoed these concerns in 
terms of direct impact on the Federal Government: 

Increased use of adversarial procedures in the courts and administrative 
process has had serious consequences. Regulatory proceedings have 
become more lengthy and complex as a result of conflict between the 
government and private parties, and have all too often led to unneces- 
sary and wasteful regulations. Moreover, lawsuits involving the 
government have become more numerous. The number of lawsuits in 
which the United States was a party grew by more than 155% in the 
last decade: from 25,000 new lawsuits a year in 1970 to 64,000 new 
lawsuits a year in 1980. The accompanying costs to the government 
have increased at an even greater rate, with legal expenses of federal 
agencies estimated to have more than tripled in the decade of the 70's. 
In a time of fiscal constraints, the government simply cannot afford 
these costs. ^^^ 

Even without the shortcomings of an excessive reliance on trial type 
procedures, alternative means of dispute resolution may have positive benefits 
beyond alleviating caseloads and resulting delay. Another prestigious, diverse 
panel found in its report to the Department of Justice concerning courts but in 
terms equally applicable to agencies: 

Society cannot and should not rely exclusively on courts for the 
resolution of disputes. Other mechanisms may be superior in a variety 
of controversies. They may be less expensive, faster, less intimidating, 
more sensitive to disputants' concerns, and more responsive to underly- 
ing problems. They may dispense better justice, result in less aliena- 
tion, produce a feeling that a dispute was actually heard, and fulfill a 
need to retain control by not handing the dispute over to lawyers, 
Judges, and the intricacies of the legal system. ^^^ 

The increased use of the full range of alternative means of dispute resolu- 
tion by administrative agencies can, in appropriate circumstances, help address 
these problems. As former Attorney General Smith has also observed, "Federal 
officials have just begun to recognize the potential of alternative dispute resolu- 
tion processes and only recently have they tried to apply these processes In 
resolving controversies In which the government Is a party. "378 

Several things appear necessary to Increase the beneficial use of dispute 
resolution techniques by Federal agencies. First Is simply an explicit recognition 



375. American Bar Association, Commission on Law and the Economy, Federal 
Regulation; Roads to Reform (1979) at 92. 

376. Smith, supra note 355, at 10; footnotes omitted. 

377. Paths to Justice , supra note 24, at 1. 

378. Smith, supra note 355, at 11. 



DISPUTE RESOLUTION PROCEDURES 239 

of their existence and potential. Second is the development of procedures and 
processes -- sometimes relatively fully developed and other times more conceptual 
and ad hoc — to tailor the general processes to the specific agencies and 
programs. Third is an outreach to make members of the private sector comfort- 
able with the potential of the new procedures. This was clearly demonstrated for 
example when the Chicago regional office of the Merit Systems Protection Board 
engaged in a conscientious outreach effort to make its constituents aware of its 
program, and that office had by far the widest use. 3*^9 Fourth is the systematic 
sharing and evaluation of the experience with the new forms so that they can be 
adjusted to meet legitimate needs and a fuller understanding of their appropriate 
use developed. 

The administrative process itself was in large measure born as an alternative 
means of dispute resolution — a way other than courts for making important 
societal decisions. It is singularly appropriate, therefore, that it should be 
responsive to various forms of dispute resolution that are gaining broad accep- 
tance in the civil sector. These processes can help administrative agencies fulfill 
their original potential. We are on our way in recognizing their role. That alone 
is a major first step towards broader, more successful use. 



379. Adams, supra note 170, at 10-11, 65-67, 85, 92. 



240 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

APPENDIX I 

SURVEY OF DISPUTE RESOLUTION METHODS 

USED IN THE 

ADMINISTRATIVE PROCESS 



This survey is a rough "catalogue" of the uses agencies currently make of 
alternative means of dispute resolution. It is based on three sources: (1) 
Agencies' responses to a questionnaire developed in conjunction with the Office of 
the Chairman of the Administrative Conference and circulated to the agency mem- 
bers of the Conference. (2) A review of all references in the United States 
Code to the terms "arbitration, mediation, conciliation, negotiation, or informal." 
(3) Programs that have come to our attention informally. 

It excludes for the most part programs dealing solely with labor relations, 
which to a very real extent are the most rich in their use of ADR techniques. 
They are not included because they so closely resemble their private sector 
counterpart and are basically a special case. 



Department of Commerce. 

Office of Export Enforcement . Under the Export Administration Act of 1979 
50 U.S.C. Appendix 2410 the Office of Export Enforcement (OEE) issues an initial 
contact letter informing a party of its intention to issue a charging letter. The 
party may discuss the proposed charges with the OEE and attempt to reach a 
pre-charging letter settlement. This method is used approximately 50% of the 
time and results in settlement of the dispute 95% of the time. This settlement is 
governed by regulations at 15 C.F.R. 388.17(b). If the dispute is not resolved, the 
charging letter is issued. The consent agreement which results from this process 
is reviewed by the Deputy Assistant for Export Enforcement. 

Office of Anti-Boycott Compliance. This office uses the procedures followed 
by the Office of Export Enforcement in all of its disputes. 

National Oceanic and Atmospheric Administration . The Office of the 
Secretary conducts a mediation of coastal zone management disputes under the 
Coastal Zone Management Act 16 U.S.C. 1451 et seq. Under the Act, the Secretary 
of Commerce is authorized to mediate disputes between a federal agency and a 
coastal state concerning a coastal management program. The Act also authorizes 
the Office of Ocean and Coastal Resources Management to mediate where a state 
agency intends to object to a federally licensed activity. The mediation must be 
agreed to by all parties. It is used once or twice a year. The mediation is 
governed by 15 C.F.R. part 930, subpart G. See also, 15 C.F.R. 930.124. If the 
mediation is not agreed to or fails, all parties have recourse to the courts. If 
informal mediation fails, formal appeal may be taken to the Secretary of Com- 
merce. 

The National Oceanic and Atmospheric Administration also administers the 
Deep Seabed Hard Mineral Resources Act, 30 U.S.C. 1401 et seq. with implementing 
regulations at 15 C.F.R. part 980. Under this Act, U.S. companies seeking licenses 
to mine manganese must resolve all disputes involving overlapping mine sites. The 
administrator of NOAA may resolve these conflicts applying principles of equity. 
Under 15 C.F.R. 970.302 the administrator will encourage companies to resolve the 
conflicts voluntarily. The NOAA will then review any subsequent voluntary 
agreement. This method of dispute resolution has been used one time. 



DISPUTE RESOLUTION PROCEDURES 241 

Personnel Law Division . The Division conducts arbitration of employee 
grievances under the Civil Service Reform Act, 5 U. S.C. 7121. Arbitration has 
been used approximately eight times a year and is governed by regulations in 29 
C.F.R. 1404 and Collective Bargaining Agreements. 



Federal Emergency Management Agency 

The agency uses alternative methods of dispute resolution in two instances. 
(1) FEMA uses arbitration under the Urban Property Protection and Reinsurance 
Act, 12 U.S.C. 1749(b). The procedures are set forth in 44 C.F.R. 56.37. No cases 
have been brought under this Act to date. (2) FEMA uses standard dispute 
resolution techniques in such matters as equal opportunity cases, adverse actions, 
performance ratings, and Merit Systems Protection Board cases. 



Commodity Futures Trading Commission. 

See Appendix II. The Commodity Exchange Act encourages private sector 
mechanisms for dispute resolution in requiring designated contract markets and 
registered futures associations to provide a voluntary equitable procedure through 
arbitration or otherwise, for the settlement of customers' claims and grievances 
against any member or employee. See 7 U.S.C. 7A(ll),21(blO). There is currently 
no limitation on the monetary value of claims which may be subject to arbitra- 
tion. The Commission recently amended its rules under 17 C.F.R. 170.8, 180.2 to 
encourage the use of arbitration as a means of dispute resolution. See 48 Fed. 
Reg. 22136. 



Consumer Product Safety Commission. 

Under the Federal Hazardous Substances Act, 15 U.S.C. 1266, the Commission 
must provide any person alleged to have violated the Act appropriate notice and 
opportunity to present his views either orally or in writing prior to the Commis- 
sion's referring a case to the U.S. Attorney for criminal prosecution. The 
Commission is also required to use informal dispute resolution procedures under 5 
C.F.R. 752.404 in the settlement of any employee disputes. 



Department of Agriculture. 

Packers and Stockyard Division . Private parties may file complaints under 
the Packers and Stockyards Act. See 7 U.S.C. 181 et seq. This complaint is filed 
in the field offices of the Packers and Stockyards Administration. The office will 
investigate the complaint and the regional supervisor may then express his 
opinions to the parties orally or by letter as to whether respondent may be liable 
to pay the complainant. After this process, if the parties wish to litigate, the 
case is referred to the Office of General Counsel for a reparation proceeding. 
Records of the numbers of such mediations which have not been followed by 
reparation cases have not been kept in recent years. In fiscal year 1974, the 
number of mediation cases was approximately 600 which far exceeded the number 
of formal reparations proceedings. 

Natural Resources Division. The agency conducts agency-initiated methods 
of dispute resolution under the National Forest System. The procedures for 



242 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

dispute resolution include appeals of decisions of forest officers under 36 C.F.R. 
211.18. This is a broad informal appeals process which is applied in approximately 
300 cases annually. Other rules of procedure include 36 C.F.R. 228.14 which is an 
appeals process available to mineral operators aggrieved by decisions in connection 
with the regulations governing locatable minerals and 36 C.F.R. 292.15 which is an 
appeals process for owners of private land within the Sawtooth National Recrea- 
tion Area. A line officer of the Forest Service resolves disputes In each of these 
specified procedures. 



Department of Defense. 

The vast majority of dispute resolution mechanisms within the Department of 
Defense are not conducted pursuant to the AFA. The following are the responses 
of the component agencies within the Department of Defense which use alterna- 
tive forms of dispute resolution. 

Army Corps of Engineers. The Corps of Engineers uses an intervening 
management level review to attempt to resolve contract disputes that would 
otherwise have to be resolved by resort to trial-type hearings before the En- 
gineers Board of Contract Appeals. This informal review is called Division Review 
of Final Contracting Officer Decisions Made at the District Level. This review 
involves a document review and an informal hearing held by the division engineer 
or his deputy at which both the contracting officer and the contractor appear and 
present their views and arguments. The division review informal hearing process 
is used at the option of the division engineer. The process is used in about 1/4 
to 1/2 of all contract dispute cases. There are no formal rules of practice or 
procedure for this review process. The hearing is informal and within the sole 
discretion of the division engineer who presides at these informal hearings. If 
the dispute is not resolved the Engineers Board of Contract Appeals holds a more 
formal hearing and subsequently renders its decision. 

Armed Services Board of Contract Appeals. All the appeals to the ASBCA 
may potentially result in hearings, however, ASBCA Rule 11 allows the parties to 
submit their case on a documentary record without a hearing. Additionally ASbcA 
Rule 12 provides for a faster decisionmaking process on truncated proceedings 
where the amount in controversy is $50,000 or less. 

Office of Dependent Schools. The Department's regulations governing the 
education of handicapped students in a DOD dependent school make mediation a 
prerequisite to a due process hearing to resolve a dispute between the parents of 
a handicapped student and school authorities. 32 C.F.R., Section 57, Appendix II, 
para. C2. School administrators who are usually not from the handicapped 
student's own school serve as mediators. If the mediation is unsuccessful, the 
parents or the school may petition for a due process hearing. 

Department of Education. 

Division of Research A Improvement, Vocational Education and Rehabilitation . 
The Randolph- Shepard Act, 20 U.S.C. 107 et seq. provides for the use of arbitra- 
tion in the resolution of disputes concerning blind persons' priority in the 
operation of vending facilities on federal property. Blind vendors who are still 
dissatisfied with state action arising from the operation or administration of the 
program after being provided a full evidentiary hearing by the state may request 
the Secretary of Education to convene an arbitration panel to resolve the dispute. 



DISPUTE RESOLUTION PROCEDURES 243 

The three member arbitration panel issues binding decisions that are considered 
final agency action. The Rehabilitation Services Administration has developed 
procedures for convening panels and conducting arbitration. The procedures are 
contained in a policy issuance program instruction, ISA PI 7817. They provide for 
a formalized evidentiary hearing including oral argument, examination, and 
cross-examination, as well as submission of written briefs. Disputes are handled 
through this arbitration mechanism whenever requests to convene panels are re- 
ceived. The RSA reviews panel decisions for consistency with federal law and 
regulations. 



Department of Energy. 

The Department of Energy's adjudications are non-APA adjudications. In one 
instance, however, DOE uses an alternative method of dispute resolution. 

Economic Regulatory Administration . The administration generally employs 
informal administrative procedures in authorizing applications to import or export 
natural gas. These procedures include the use of public conferences, pre-hearing 
conferences, oral and written presentations, and opportunities for reply comments. 
The Economic Regulatory Administration almost always uses informal mechanisms 
in its consideration of natural gas import and export authorizations. Procedures 
are governed by 18 C.F.R., Chapter 1, but new rules have been proposed. The 
agency decides which procedures will be applied. The ERA administrator acts as 
the decisionmaker in the process. The ERA also, in certain instances, has 
required opposing parties to meet privately to resolve certain problems or to 
obtain additional factual information. Under this private sector mechanism, the 
ERA establishes the time-table under which parties will meet. This private sector 
mechanism has not been used frequently. 

Federal Energy Regulatory Commission . Approximately 80% of the Commis- 
sion's caseload is resolved through negotiated settlements without appointment of 
an ALJ. However, a settlement judge may be appointed when informal discussions 
have not been fruitful but one or more parties believes it is possible to settle the 
case. Settlement judges were appointed in seven cases in fiscal year '83. The 
settlement judge is appointed pursuant to 18 C.F.R. 385.603. 

In addition, the Commission staff engages in a form of mediation in develop- 
ing environmental conditions on licenses for hydroelectric generating plants. It 
also uses a form of mediation among interested parties in developing environmen- 
tal impact statements and developing nationwide plans. 

Nuclear Waste . The DOE is required to resolve disputes concerning the 
siting of nuclear waste repositories through a written agreement with the affected 
state or Indian tribe, arrived at through negotiation or arbitration. See 42 U.S.C. 
Section 10131 et seq. 



Department of Health and Human Services. 

Within the Department of Health and Human Services, the Public Health 
Service, the Health Care Financing Administration, the Office of Human Devel- 
opment Services, and the Office of Community Services provide for a variety of 
non-APA adjudications. Informal dispute resolution, where it exists, has no 
predetermined procedures or personnel. 



244 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

The Health Care Financing Administration, however, is required under 45 
C.F.R., Section 201.6(c) to pursue informal efforts to resolve disputes with a state, 
before instituting a formal hearing. In addition, all the agencies with which the 
Health Care Financing Administration deals attempt to informally resolve disputes 
with grantees prior to the commencement of formal proceedings. 

HHS is also required to publish regulations to provide for appropriate 
investigative, conciliation and conference procedures for the resolution of age 
discrimination suits in federally assisted programs. See 42 U.S.C. Section 6101. 

The Departmental Grant Appeals Board of HHS has established a mediation 
program. The process was modeled on one established by EPA which created a 
program in 1979. HHS's rule provides that the Board in consultation with the 
parties may suggest the use of mediation techniques and will provide or assist in 
selecting the mediator. The mediator may take any steps agreed upon by the 
parties to resolve a dispute or clarify the issues. The results of mediation are 
not binding upon the parties unless they so agree in writing. The Board will also 
provide people trained in mediation skills to aid in resolving a dispute that is not 
pending before the Board itself. At least seven cases have been heard under this 
process. 

Department of Housing and Urban Development. 

Bid protests under National Housing Act Contracts, 12 U.S.C. Section 1701 et 
seq, 42 U.S.C. 3535(d) and 24 C.F.R. Part 20 Subpart C, may be decided by the 
HUD Board of Contract Appeals upon written submission of the protestor and 
procuring agent. This procedure is followed in all cases of bid protests under a 
National Housing Act Contract. The procedure is used in approximately 8 cases 
per year. 

The Fair Housing Act of 1968, 42 U.S.C. Section 3601 et seq directs the 
secretary to attempt to resolve all complaints under the Act through informal 
methods of conference, conciliation or persuasion. 

Department of Transportation. 

Urban Mass Transportation Administration . The Department's Disadvantaged 
Business Enterprise Regulations require an UMTA recipient who is unable to meet 
a 10% goal to meet with a UMTA administrator to discuss how best to meet that 
goal. The UMTA currently is considering the possibility of encouraging private 
parties with complaints against UMTA recipients to try to resolve those disputes 
locally before involving UMTA. 

Office of Civil Rights. The Office uses alternative methods of dispute 
resolution in considering participation by minority business enterprises in Depart- 
ment of Transportation programs. Any firm which believes that it has been 
wrongly denied certification as a minority business enterprise may file an appeal 
with the Department of Transportation. This appeal is governed by regulations in 
49 C.F.R. 23.55. The Secretary of Transportation serves as fact finder over these 
cases with delegation to the Departmental Director of Civil Rights. Approximately 
ISO cases are handled per year In this program. 

The DOT also encourages recipients of financial assistance to establish 
procedures for hearing appeals of denials of minority business enterprise certifica- 



DISPUTE RESOLUTION PROCEDURES 245 

tion. These recipients are usually local or state governments. This non-federal 
mechanism is not widely used. Perhaps less than 10 recipients have established 
their own procedures for hearing these appeals. The recipients who have 
established such a procedure address a rather high number of cases -- possibly 150 
to 200 per year. The Department of Transportation does not monitor the 
operation of these hearings. Businesses denied certification maintain the right to 
file an appeal with the Department when they are dissatisfied with the results of 
recipient's hearings. 

National Highway Traffic Safety Administration . Where the agency believes 
civil penalties may be appropriate for violations of the Motor Vehicle Information 
and Cost Saving Act, 15 U. S.C. 1981-1991, or the Federal Motor Vehicle Safety 
Standards promulgated under the National Traffic and Motor Vehicle Safety Act, 
15 U.S.C. 1392, NHTSA has developed procedures for informal resolution without 
resort to an agency hearing. The procedures are not incorporated by the agency 
in its regulations. Generally the agency sends the manufacturer a notice letter 
advising it of the agency's view that a violation exists and of the possible liabil- 
ity for civil penalties. This letter informs the manufacturer that it has the 
opportunity to submit data to use in arguments that would show that the violation 
did not occur and/or that there is a reason to mitigate the amount of the 
penalty. The agency then considers the information submitted by the manufac- 
turer and arrives at what it views as an appropriate civil penalty amount. 
Further negotiations may proceed before the final figure is established. From 
August 1982 to August 1983 the above procedures have resulted in the collection 
of $146,000 in penalties for 11 standards enforcement cases and a total of $9,000 
for nine odometer cases. 



Environmental Protection Agency. 

In the area of hazardous wastes. Section 3013 of RCRA authorizes EPA to 
issue orders requiring parties to conduct testing or monitoring of hazardous waste 
sites or facilities. Section 106 of the Superfund authorizes EPA to issue orders 
requiring parties to take action necessary to protect the public from the dangers 
associated with the release of hazardous substances. Recipients of either type of 
order may take advantage of the opportunity to informally confer with the agency 
concerning the terms of the order. There are no set procedures governing the 
conduct of the proceedings. In 1983 there were 15 Section 3013 orders and 26 
Section 106 orders issued. The selection of presiding officers for this proceeding 
has not been standardized. 

Under the Superfund Act any claim against the fund rejected by the 
President is to be heard by a member of a Board of Arbitrators. 42 U.S.C. 
Section 9612. An arbitrator's decision may be appealed to a Federal District 
Court but may only be reversed if found to be arbitrary and capricious. 

Arbitration is also authorized by the Federal Insecticide, Fungicide and 
Rodenticide Act (FIFRA), 7 U.S.C. Section 136 which requires the use of arbitra- 
tion to establish the compensation due for one applicant's use of prior submitted 
data in an application for registration of a pesticide. 7 U.S.C. Section 136(a). 

Equal Employment Opportunity Commission. 

Under 42 U.S.C. Section 2000-e-5(b) the EEOC is authorized to attempt to 
eliminate alleged unlawful employment practices by informal methods of con- 



246 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

ference, conciliation and persuasion. 

Federal Communications Commiasion. 

The FCC uses several agency Initiated alternatives to dispute resolution. 

Paper hearings. Under 47 U.S.C. Section 309e, the FCC may conduct paper 
hearings in situations where there are competing applicants for low power 
television service. To date, none have been conducted. The rules of practice 
governing these hearings are found at 47 C.F.R. Section 1.241a. If the Commission 
cannot resolve the controversy, a regular trial-type hearing is conducted. 

Expedited hearings. Under 47 U.S.C. Section 309e the Commission may 
conduct expedited hearings involving basic qualifying issues for competing 
applicants for cellular radio service facilities. The FCC reports that this proce- 
dure basically involves strict adherence to a hearing schedule already prescribed 
by the rules. The rules governing this expedited hearing are found in 47 C.F.R. 
Section 22.916 and Section 22.917. 

The FCC also provides for private sector mechanisms for some licensees who 
are encouraged to resolve electrical interference problems without the Commis- 
sion's intervention. Absent industry cooperative efforts the resolution of these 
interference issues would trigger agency proceedings. The agency does not keep 
detailed information about the exact measures taken by communications industries 
in private sector negotiations. The agency also does not review measures 
negotiated and placed into effect through private action. The agency's Field 
Operations Bureau does monitor and reinforce the effectiveness of these measures. 

Federal Election Commiasion. 

Under 2 U.S.C. 437(g), if upon investigation of a complaint or upon its own 
initiative the FEC concludes a violation of federal campaign laws has occurred, 
the FEC has 30 days to make every effort to conciliate a resolution of the 
violation. Any resulting conciliation agreement will conclude the EEC's interest 
in the matter. If informal dispute resolution methods fail, the FEC may file a 
civil action. 

Federal Labor Relations Authority. 

Title VII of the Civil Service Reform Act of 1978 established the Federal 
Service Impasses Panel as an entity within the FLRA. This panel Is to provide 
assistance In resolving negotiation Impasses between federal agencies and exclusive 
representatives of federal employees. The Impasses Panel Is not required to use 
any particular procedure In the resolution of negotiation Impasses. The Panel has 
broad authority to fashion procedures appropriate to resolve disputes and does so 
on a case-by-case basis. The following are the most often used procedures. 

Factfinding. Factfinding Involves a hearing before a Panel member or a 
Panel designee the purpose of which Is to establish a complete record of the 
issues In dispute and the positions of the parties. This Involves a trial-type 
hearing after which the Panel issues its own settlement recommendations or it 
may issue a binding decision. 



DISPUTE RESOLUTION PROCEDURES 247 

Written submissions. This procedure does not involve a hearing. The parties 
exchange written statements of position and supporting evidence and may subse- 
quently exchange rebuttal statements. After consideration of the written material 
the Panel may make recommendations for settlement or issue a binding decision. 

Arbitration. The Civil Service Reform Act of 1978 authorizes the parties to 
voluntarily submit their dispute to an independent arbitrator after the procedure 
has been approved by the Panel. 

Med-Arb. When med-arb is used a neutral is given the authority to both 
mediate the dispute and make a binding award on those issues not resolved during 
the mediation. This procedure often leads to a resolution without the neutral 
having to issue a decision. 

The Federal Service Impasses Panel makes the decision as to which proce- 
dures will be used to resolve a dispute. To date, factfinding has been directed 14 
times, written submissions have been employed 42 times, outside arbitration has 
been recommended in 14 cases and the med-arb procedure has been used in 20 
cases. The Impasse Panel's regulations governing factfinding hearings can be 
found in 5 C.F.R. Parts 2470 through 2472. There are no published rules or 
procedures applicable to the other procedures. Factfinding hearings are held by a 
panel member or a panel designee. There is no designated representative when 
written submissions are used. Outside arbitration is conducted by a panel 
designee or a person chosen by the parties. Each of these procedures will result 
in a final and binding decision unless the parties have negotiated a settlement. 



Federal Maritime Commission. 

The Commission uses several alternative methods for resolving disputes 
without resorting to formal hearings. 

The Commission uses an informal procedure for adjudication of small claims 
-- those claims for less than $10,000. The proceeding is conducted under the APA 
by a settlement officer and by the Secretary of the Commission. The record 
consists of written evidence and arguments. The decision of the settlement 
officer is not subject to appeal by the parties but may be reviewed by the 
Commission on its own motion. The parties, however, may seek review in federal 
court. The regulations governing this informal procedure are found at 46 C.F.R., 
Section 502.301. 

The Commission uses a shortened adjudicatory procedure conducted before an 
ALJ. The proceeding is limited to the submission of memoranda, facts and 
arguments. The parties must consent to this procedure which is used frequently. 

The Commission has also used a non-adjudicatory fact finding investigation. 
These investigations are conducted by agency personnel designated by the 
Commission. The regulations for this investigation procedure are found at 46 
C.F.R., Section 502.281. 

The Commission also has a conciliation service. The regulations are found at 
46 C.F.R., Section 502.401. This conciliation service is rarely used. This dispute 
resolution mechanism is applied when all parties consent to the conciliation 
service. The parties must also consent to any opinion developed as a result of 
the conciliation service. 



248 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

The Commission also develops compromise agreements in its application of 
civil penalties. The Commission's Bureau of Hearing Counsel is authorized to 
assess penalties, enter into negotiations and reach a compromise with the person 
involved and to obtain payment of the penalty. Any compromise agreement is 
executed between a party and the Director of the Bureau of Hearing Counsel. 
The regulations covering this procedure are found at 46 C.F.R., Section 505.4. If 
agreement cannot be reached on the terms of a civil penalty, the matter is 
referred to the Commission for a formal proceeding. 

The Commission also oversees two private sector mechanisms for dispute 
resolution. First, the Commission oversees a self-policing mechanism used by 
shipping conferences or other rate-making associations under Section 15 of the 
Shipping Act of 1916 found at 46 U.S.C. Section 14. Under this mechanism a 
neutral body investigates alleged violations of agreements by members of the 
conferences or rate-making associations and determines if fines are merited. All 
conferences or rate-making associations of more than two members are required 
to employ such self-policing mechanisms and to report to the Commission periodi- 
cally on their activities. The Commission does not generally review decisions of 
the neutral bodies. 

Second, shippers may also file complaints with conferences and other 
rate-making bodies concerning the rates and practices of the conferences. The 
procedure is required by Section 15 of the Shipping Act, 46 U.S.C. Section 814 and 
by 46 C.F.R. Part 527. If the conference does not respond favorably to a request, 
the complaining party may file a formal complaint with the Commission. 

Federal Mediation and Conciliation Service. 

The function of the Federal Mediation and Conciliation Service is to assist 
parties to labor disputes through conciliation and mediation. The Service is 
utilized in disputes which significantly affect Commerce. FMCS mediates com- 
plaints brought under the Age Discrimination Act. 



Federal Reserve System. 

The Federal Reserve System processes consumer complaints against state 
member banks and forwards any complaints it receives against other creditors or 
businesses to the appropriate state or federal enforcement agencies. In 1982 the 
System received 2,840 complaints of which 1,226 were against state member banks. 
The Federal Reserve banks respond to these complaints in writing. The Federal 
Reserve Board monitors the complaint resolution process by periodically reviewing 
complaint investigations and responses and complaint handling activities of the 
Federal Reserve Banks. 



Federal Trade Commission. 

See Appendix III. 

General Accounting Office. 

The GAO provides an alternative to trial-type dispute resolution in its Bid 
Protest Forum which is described in 4 C.F.R. Part 21. This Forum handles 



DISPUTE RESOLUTION PROCEDURES 249 

approximately 1,000 cases each year. An attorney with GAO writes the initial 
draft decision. All final decisions are signed by the Comptroller General. 

The GAO uses alternatives to trial-type hearings in settling doubtful claims 
and in considering advance decisions. See 31 U. S.C. Section 711, 31 U.S.C 3529 and 
31 U.S.C. 3702. The agency chooses when to use alternative procedures. Such 
procedures were used in fiscal year 1982 in rendering approximately 1,000 advance 
decisions and in determinations of accountable officers' liabilities. In the claims 
area the GAO handled 1,000 waiver requests, 7,241 claims by the U.S. and 2,400 
claims against the U.S. The procedures are set forth in 4 C.F.R. Ch. I, parts 22, 
30-35, 53, 91-93, Ch. II, parts 101-105. Claims are handled by claims examiners, 
with appeals taken to attorneys in the Office of General Counsel. Individuals 
dissatisfied with GAO actions may appeal to the courts. 



Interstate Commerce Commission. 

Most of this Commission's cases are decided through its modified procedure 
whereby the agency decides a case exclusively on written submissions under the 
APA. The Commission's Office of Proceedings prepares all modified procedure 
decisions. 



Merit Systems Protection Board. 

See Appendix II. 

National Mediation Board. 

The Railway Labor Act, 41 U.S.C. Section 151 et seq. created the Board to 
settle railroad/employee disputes. If mediation fails, the Board is to induce the 
parties to enter arbitration. Arbitrators are selected under procedures found in 
45 U.S.C. Section 157. 

Nuclear Regulatory Commission. 

The NRC has experimented with the use of informal procedures in its 
licensing proceedings. On several occasions the Chairman of the Atomic Safety 
and Licensing Board Panel has selected a member of the Panel to act as a 
presiding officer. This presiding officer may allow parties to present oral 
arguments at his discretion. An order may be issued by the Commission based 
upon written comments received by the presiding officer. Regulations have not 
yet been developed to govern this type of informal dispute resolution. The 
Commission's authority to conduct these informal proceedings is found in 42 
U.S.C. 2239. 

Office of the Federal Inspector, Alaska Natural Gas Transportation System. 

This agency oversees the construction of the Alaska Natural Gas Transporta- 
tion System. The agency employs informal dispute resolution mechanisms in its 
determination of rate-based decisions and in its investigation of claims of racial 
discrimination. The procedures are set forth in 46 Fed. Reg. 51726 and Enforce- 



250 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

ment Procedures for Equal Opportunity Regulations, 10 C.F.R. Part 1534. The 
agency attempts to resolve disputes through conciliation, however, if matters are 
not resolved the Federal Inspector has the final decision. 



Pension Benefits Guaranty Corporation. 

The PBGC has an appeals board which has the discretion to grant an oral 
hearing, however no such hearing has ever been held. The board handles 
approximately 250 cases per year. The board's procedures are found at 29 C.F.R. 
2606.52 et. seq. 

The PBGC has two alternatives to the appeals board, reconsideration and 
informal review. An aggrieved party may request reconsideration of a PBGC staff 
decision. This reconsideration will be undertaken by a person of higher authority 
than the original decisionmaker. The procedures for reconsideration are found at 
29 C.F.R. 2606.31 et seq. The decision to request appeal or reconsideration 
depends upon the type of determination made. The PBGC makes over 900 
reconsiderations per year. A person dissatisfied with the result of a reconsidera- 
tion may sue in court. 

The second informal procedure used by the PBGC is an informal review 
process under 29 C.F.R. Section 2606.1(c). 

See discussion in Appendix II. 



Postal Rate Commission. 

The Postal Rate Commission currently follows a complaint case procedure set 
forth in 39 C.F.R. Section 3001.85. The Commission, however, has a proposed 
rulemaking [check status] which would amend its current procedure to include a 
provision that would allow the Commission to use informal inquiry methods to 
resolve complaint cases. Under this proposal, the Commission may choose to 
conduct a preliminary investigation before filing a formal answer in a complaint 
case. Under this proposal, a Commission employee would act as a facilitator of a 
pending dispute. If the informal inquiry method did not resolve the dispute, a 
formal complaint case would proceed. 

lailroad Retirement Board. 

The board's adjudications are non-APA adjudications. The agency, however, 
has proposed using a board of real estate appraisers in resolving disputes con- 
cerning a value of a home under the Railroad Retirement Act. See 45 U.S.C. 
Section 395.8(d). The board has also considered using a similar mechanism to 
resolve benefit disputes under the Rock Island Railroad Transition and Employee 
Assistance Act, 45 U.S.C. Section 1001 et seq. 

Securities and Exchange Commission. 

The SEC does not employ any alternative methods of dispute resolution. 
However, the Commission does in 17 C.F.R. 202. 5C provide for a procedure by 
which the subject of a Commission investigation may submit a written statement 
to the Division of Enforcement explaining why no enforcement action should be 



DISPUTE RESOLUTION PROCEDURES 251 

brought against him. 

Additionally, the SEC has encouraged the security industry's self-regulatory 
organizations to adopt a uniform code of arbitration. This arbitration is available 
for resolution of certain disputes between broker/ dealers and their customers. 
The Commission also relies on the self-regulatory organizations to discipline their 
members for violations of security laws and the regulatory organization's own 
rules. This practice is authorized by Sections 6(b)6, 15a(b)(7) and 19(g)(2) of the 
Exchange Act of 1934. 



252 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

APPENDIX II 
CASE STUDIES OP ADMINISTRATIVE ARBITRATION 



Federal Insecticide, Fungicide and Rodenticide Act. 

The Federal Insecticide, Fungicide and Rodenticide Act^SO authorizes the 
Environmental Protection Agency to use data received from one applicant for a 
pesticide registration in support of another applicant's request for registration. 
The Act requires the applicant which benefits from the use of another's data to 
compensate the original data submitter for its use. 381 FIFRA's 1978 amend- 
ments382 mandate the use of arbitration to resolve disputes between pesticide 
manufacturers concerning the amount of compensation owed. 

EPA's use of previously submitted data In support of subsequent "me-too" or 
"follow-on" pesticide registration applications was first authorized by statute in 
1972383 in the Federal Environmental Pesticide Control Act, 384 which amended 
FIFRA to convert It from a licensing and labelling statute into a comprehensive 
regulatory scheme governing the use, sale and labelling of pesticides. 385 These 
1972 amendments created the data use provision which requires an applicant to 
compensate an original data submitter for the benefit derived from the use of Its 
data. 386 Originally, EPA was to determine the proper amount of compensation 
due In cases In which the parties could not negotiate a price. 387 However, 
Congress amended FIFRA In 1978, restructured the data compensation system and 



380. Pub. L. No. 80-104; 61 Stat. 163 (1947), codified as amended 7 U.S.C. § 136 
et seq. 

381. § 3(c)(1)(D); codified at 7 U.S.C. § 136a(c)(l)( D). 

382. Federal Pesticides Act, Pub. L. No. 95-396; 92 Stat. 819 (1978). 

383. Federal Environmental Pesticide Control Act, Pub. L. No. 92-516; 86 Stat. 977 
(1972). 

384. See Ruckelshaus v. Monsanto , 104 S.Ct. 2862 (1984). 

385. As enacted in 1947, FIFRA was primarily a licensing and labelling statute. 
Under the Act, each pesticide had to be registered with the Secretary of 
Agriculture prior to sale. The Act required a manufacturer seeking a 
pesticide registration to supply the Secretary with Information necessary to 
support the claims made on the label. The Act prohibited the Secretary 
from disclosing a manufacturer's formula but was silent concerning the 
Secretary's obligation in regard to health and safety data submitted with an 
application. The 1972 amendments expanded FIFRA to regulate the use, sale 
and labelling of pesticides. Congress added an environmental criterion to 
the requirements for a pesticide registration. Since 1972 the administrator 
of the Environmental Protection Agency must find that a pesticide will not 
cause unreasonable adverse affects on the environment before registering a 
new pesticide. 

386. § 3(c)(1)(D); 86 Stat. 

387. Id. 



DISPUTE RESOLUTION PROCEDURES 253 

prescribed the use of binding arbitration to resolve disputes concerning the 
amount of compensation one applicant should pay to another for the use of its 
data. 38^ 

Congress's reason for establishing binding arbitration for resolution of these 
disputes is not entirely clear. 389 Although the data compensation provisions 

were the subject of much debate, the central issues involved what data would be 
compensable and the duration of any compensation period accorded to original 
data submissions. 390 The legislative history does not explicitly reveal why 
Congress instituted binding arbitration. Congress was concerned that the 
resolution of the controversies that had developed over the existing compensation 
scheme was consuming too many agency resources. It, and EPA, felt that these 
decisions did "not require active government involvement, [but rather should] be 
determined to the fullest extent practicable, within the private sector. "391 xhe 
notion of using binding arbitration emerged as a compromise between the data 
suppliers and the data users. 392 

It operates only if the parties have failed to agree on an amount of 
compensation or to a procedure for reaching agreement. Thus, the legislation 
primarily encourages the parties to resolve a dispute over compensation through 
private agreement and authorizes binding arbitration only as a last resort. 393 

FIFRA grants original data submitters a right to compensation when data is 
used for the benefit of another applicant within fifteen years of the original data 
submission. 394 Under the Act, any applicant who will benefit from EPA's use of 



388. 7 U.S.C. § 136a(c)(l)(D). 



389. U.S. Congress, House Joint Committee on Conference, to accompany S.1678, a 
bill to amend the Federal Insecticide Fungicide and Rodenticide Act, 95th 
Congress 2nd Session, H. Report 95-1560, September, 1978; U.S. Congress, 
House, Committee on Agriculture, Report to accompany H.R. 7073 a bill to 
extend the Federal Insecticide Fungicide and Rodenticide Act, 95th Congress, 
1st Session, H. Report No. 95-343; U.S. Congress, House, Committee on 
Agriculture, Report to accompany H.R. 8681. 95th Congress 1st Session, H. 
Report No. 95-663. 

390. U.S. Congress, House, Committee on Agriculture, Report to accompany H.R. 
7073, 95th Congress 1st Session, H. Report No. 95-343, p. 3. 

391. Statement of Sen. Leahy, floor manager of S. 1678, 123 Cong. Rec. 25709 
(1977). See the description of Congress's concern in Thomas v. Union 
Carbide Agr. Products Co., 105 S. Ct. 3325, 3329-3330 (1985). 

392. Hearings on Extending and Amending FIFRA before the Subcommittee on 
Department Investigations, Oversight, and Research of the House Committee 
on Agriculture, 95th Cong., 1st Sess., 522-523 (1977) (testimony of Robert 
Alikonis, General Counsel to Pesticide Formulators Assn.). 

393. 7 U.S.C. § 136a(c)(l)(D)(ii). 

394. § 3(c)(1)(D) divides the data EPA may use into three categories, data 
supplied to EPA before 1969, data supplied after 1969, and data supplied 
after 1978. The Act permits EPA to use data supplied prior to 1969 in its 

(continued...) 



254 



ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 



data submitted less than fifteen years earlier by another applicant must make an 
offer to compensate the original data submitter for this use. If after ninety days 
the new applicant and the original data submitter have not reached agreement on 
the amount and terms of compensation either party may submit the dispute to 
arbitration by filing a request with the Federal Mediation and Conciliation 
Service. 395 Participation of both parties is compelled since an original data 
submitter who fails to participate forfeits its right to compensation and any new 
applicant who fails to participate will be denied registration. 396 

For the purpose of complying with FIFRA, the Federal Mediation and Con- 
ciliation Service has adopted the roster of commercial arbitrators of the American 
Arbitration Association as well as AAA's FIFRA arbitration rules. 397 Requests for 
arbitration are forwarded directly to the AAA which notifies the other party of 
the request. 398 Unless the parties agree to a different procedure, AAA selects an 
arbitrator from the AAA roster after each party has reviewed a list of potential 
arbitrators and rated these individuals by degree of acceptability. 399 Unless the 
parties specify otherwise, a single arbitrator hears each dispute. ^00 Neutrality is 
the central qualification for serving as an arbitrator. 401 Each person appointed 
as a neutral arbitrator must disclose to AAA any circumstances which could affect 
his impartiality including any financial interest, bias or past relationship with any 
of the parties. 402 AAA determines whether an arbitrator is or is not neutral. 403 



394. (...continued) 

consideration of any application for registration without the permission of 
the original data submitter. This data submitter is not entitled to any 
compensation for the use of its data. EPA may use data supplied to it after 
1969 in its consideration of any other manufacturer's application so long as 
the benefitting applicant makes an offer to compensate the data submitter 
for the use of its data. The third category of data is that which is supplied 
to EPA after September 30, 1978. FIFRA guarantees that the applicant who 
submits data after September 30, 1978 will have exclusive use of this data 
for a period of ten years. At the end of this ten year period this data 
submitter will be entitled to compensation for the use of its data for a 
period of five years. See, § 3(c)(l)(D)(iii). 

FIFRA also provides for the use of binding arbitration to resolve the 

question of compensation when pesticide registrants agree to share the cost 
of supplying EPA with any additional data requested and are unable to agree 
on the amounts of contribution. 7 U.S.C. § 136a(2)( B)(iii). 

395. 7 U.S.C. § 136a(c)(l)(D). 

396. Id. 



397. 29 C.F.R. § 1440.1(b). 

398. 29 C.F.R. § 1440.1(a). 

399. 29 C.F.R. § 1440.1 Appendix Sec. 6. 

400. 29 C.F.R. § 1440.1 Appendix Sec. 9. 

401. 29 C.F.R. § 1440.1 Appendix Sec. 5. 

402. 29 C.F.R. § 1440.1 Appendix Sec. 11. 



DISPUTE RESOLUTION PROCEDURES 255 

AAA's determination is appealable to FMCS whose decision is conclusive. ^04 

Once the arbitrator is selected, the claimant or person seeking compensation 
has 60 days in which to file a statement detailing the amount claimed and the 
reasons to support the claim. '^OS j^e other party then has 60 days to respond. ^06 
The parties may move for discovery through written interrogatories or requests 
for production of documents. ^07 jhe arbitrator grants requests designed to 
produce relevant evidence and allows discovery to a degree, "consistent with the 
objective of securing a just and inexpensive determination of the dispute without 
unnecessary delay. "^^8 jhe arbitrator is empowered to order depositions upon a 
showing of good cause. ^09 The arbitrator may arrange a prehearing conference in 
which the parties appear before him to consider the possibility of settling the 
dispute, narrowing the issues, obtaining stipulations or otherwise expediting the 
disposition of the proceeding. ^10 At the hearing, the claimant presents his case 
followed by the respondent. ^11 The claimant must carry the burden of coming 
forward with evidence to support his claim. '^l^ -phe arbitrator decides each issue 
based upon a preponderance of the evidence. ^13 Any party may request that a 
stenographic record of the hearing be kept and designated the official transcript 
of the proceeding. ^14 After the hearing, the parties may submit written briefs 
supporting their position and the arbitrator may at his discretion permit oral 
argument on these briefs. ^^^ 

The arbitrator must issue a decision after the proceeding has closed. ^^^ 
This decision must contain findings of fact and conclusions of law with reasoning 
covering all issues in dispute in the case. The decision must also contain a 
determination concerning any compensation due. 



403. Id. 

404. Id. 

405. 29 C.F.R. § 1440.1 Appendix Sec. 13(a). 

406. 29 C.F.R. § 1440.1 Appendix Sec. 13(b). 

407. 29 C.F.R. § 1440.1 Appendix Sec. 23. 

408. 29 C.F.R. § 1440.1 Appendix Sec. 23(a). 

409. 29 C.F.R. § 1440.1 Appendix Sec. 23(b). 

410. 29 C.F.R. § 1440.1 Appendix Sec. 24. 

411. 29 C.F.R. § 1440.1 Appendix Sec. 26. 

412. 29 C.F.R. § 1440.1 Appendix Sec. 28. 

413. Id. 

414. 29 C.F.R. § 1440.1 Appendix Sec. 29. 

415. 29 C.F.R. § 1440.1 *opendix Sec 30. 

416. 29 C.F.R. § 1440.1 Appendix Sec. 32. 



256 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

Parties involved in cases in which the disputed amount is $25,000 or less 
may opt for resolution of their dispute through an expedited procedure. ^1*^ Under 
this procedure the claim proceeds to hearing within thirty days without discovery 
or the submission of briefs. The arbitrator's decision consists of short summary 
findings of fact and conclusions of law. 

FIFRA provides that an arbitrator's decision is final and conclusive. ^^8 jy^^ 
decision is reviewable in court only in the case of "fraud, misrepresentation, or 
other misconduct by one of the parties to the arbitration or the arbitrator. . . 
."419 This narrow scope of judicial review is typical of the level of judicial 
review available in commercial arbitration. 

The arbitration provision has sparked a host of constitutional challenges that 
are reviewed above. ^20 



Pension Benefit Guaranty Corporation. 

The Multiemployer Pension Plan Amendments Act of 1980'*21( ^ppAA) 
amended the Employee Retirement Income Security Act of 1974'*22 (ERISA), to 
impose liability upon any employer that withdraws from a multiemployer pension 
plan. 423 MPPAA requires pension plan sponsors and withdrawing employers to 
arbitrate disputes over the amount of an employer's withdrawal liability. ^24 

As originally enacted, ERISA permitted employers to withdraw from multi- 
employer plans free of any future liability so long as the plan did not terminate 
within five years of that employer's withdrawal. ^25 T^g employer's obligation to 
the plan ceased upon withdrawal. However, the plan itself remained liable to pay 
the benefits which had been promised to that employer's employees during the 
period of participation. MPPAA created withdrawal liability to prevent employers 
from withdrawing and leaving the plan obligated to pay the benefits from a 



417. 29 C.F.R. § 1440.1 Appendix Sec. 22. 

418. 7 U.S.C. § 136a(c)(l)(D)(ii). 

419. Id. 

420. See discussion In text at notes 114-119; 154-165. 

421. P.L. No. 96-364, 94 Stat. 1217, codified at 29 U.S.C. § 1381 et.seq. 

422. P.L. No. 93-406, codified at 29 U.S.C. § 1001 et. seq. 

423. A multiemployer pension plan is one which is maintained under one or more 
collective bargaining agreements and covers employees of two or more 
employers. Employers contribute to the plan fund at rates specified In their 
agreements. These contributions are paid Into a pooled fund which is 
administered by a board of trustees composed of employer designated and 
union designated members. 

424. 29 U.S.C. § 1401. 

425. 29 U.S.C. § 1001. 



DISPUTE RESOLUTION PROCEDURES 257 



reduced pension fund pool.426 Upon an employer's withdrawal from a plan, 

MPPAA requires the plan sponsor to determine the extent of the withdrawal 
liability. '^^T Any dispute that arises concerning any determination made by the 
plan sponsor is resolved through arbitration. ^28 

MPPAA's legislative history does not reveal why Congress instituted compul- 
sory arbitration to determine a withdrawing employer's liability to the plan 
sponsor. 429 The bill which originally passed the House^SO did not contain an 
arbitration provision. The Senate passed a bill^Sl jn the form of a substitute to 
the House bill. This Senate bill contained an arbitration provision. There is no 
Senate Report. The House amended the provision to affect the level of judicial 
review, and this was accepted by the Senate. The Conference Report is silent 
concerning the arbitration provision. 432 

The Act directs the Pension Benefit Guaranty Corporation to promulgate 
rules governing the conduct of the prescribed arbitration. 433 The PBGC published 
a proposed rule on July 7, 1983.434 pBGC received 20 comments and incorpor- 
ated many of the suggestions in the final rule which was published on August 27, 
1985. PBGC resolved conflicting suggestions by determining which views best 
fulfilled the statutory mandate to establish "fair and equitable procedures. "435 
Prior to the rules' becoming effective, employers and plan sponsors arbitrated 
their disputes under Multiemployer Pension Plan Arbitration Rules jointly spon- 
sored by the International Foundation of Employee Benefit Plans and the American 
Arbitration Association. 436 The new rules apply to arbitration proceedings 
initiated, pursuant to Section 42221 of the Act, on or after September 26, 
1985.437 



426. U.S. Congress, Committee on Conference, 96th Congress H. Rept. 96-1343. 

427. 29 U.S.C. § 1381-1399. 

428. 29 U.S.C. § 1401. 

429. U.S. Congress, Committee on Conference, 96 Congress H. Rept. 96-1343; 
House, Committee on Education and Labor, H. Rept. 96-889. 

430. H.R. 3904, May, 1980. 

431. S. 1076 July, 29, 1980. 

432. H. Rept. 96-1343. 

433. 29 U.S.C. § 1401(a)(2). 

434. 48 Fed. Reg. 31241 (July 7, 1983). 

435. 50 Fed. Reg. 34679 (August 27, 1985). 

436. The Multiemployer Pension Plan Rules are sponsored by the International 
Foundation of Employee Benefit Plans and administered by the American 
Arbitration Association. The rules became effective on June 1, 1981, and are 
available from the AAA. 

437. 50 Fed. Reg. 34683 (August 27, 1985). 



258 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

In lieu of the PBGC's final rules governing arbitration, disputing parties may 
also use other plan rules procedures if they are consistent with the PBGC 
rules438 or if they are approved by the PBGC in accordance with procedures set 
forth in § 2641.13.'*39 The PBGC will approve the alternative procedures if 

the proposed rules will be substantially fair to all parties involved and if the 
sponsoring organization is neutral. '^'^^ 

Under the Act and the PBGC final rules, 441 either of the parties may 
initiate arbitration within the 60 day period beginning on the 121st day after the 
date on which the employer requested reconsideration, or if the plan sponsor re- 
sponds earlier to the request, within 60 days after the employer receives the 
notification of reconsideration. The parties may jointly request arbitration for 
180 days after the plan sponsor has notified the employer of the contractual 
liability and demanded payment. 4^*2 

The arbitrator's powers and duties are, with a few exceptions, the same as 
an arbitrator conducting a proceeding under Title 9 of the U.S. Code.'*^^ The 
rules require the arbitrator to follow existing law, as discerned from pertinent 
authority. 4^*4 The regulation does not, however, tell the arbitrator exactly where 
settled law is to be found. '^^S 

The final rules differ from the proposed rules in that they do not paraphrase 
the statutory presumptions that the arbitrator must make as set forth in Section 
4221(a)(3) of the Act. The PBGC agreed with several comments that it was 
superfluous and omitted the paraphrase from the final rules. ^^^^ 

Under MPPAA, a plan sponsor's determinations are presumed correct unless 
it is shown by a preponderance of evidence that a determination is unreasonable 
or clearly erroneous. 447 Withdrawing employers criticized this presumption, 
arguing that plan sponsors have an incentive to find large amounts of liability and 
thus are not impartial and do not deserve a presumption favoring their determina- 
tions. For example, in Board of Trustees of the Western Conference of Teamsters 
Pension Trust Fund v. Thompson Building Materials, Inc,^"*^ Thompson contended 



438. § 2641.1. 

439. 50 Fed. Reg. 34686 (August 27, 1985). 

440. § 2641.13(d). 

441. § 2641.2(a)(l)(2). 

442. 29 U.S.C. 1401 (a)(1). 

443. § 2641.4(a). 

444. § 2641.4(b). 

445. 50 Fed. Reg. 34681. 

446. 50 Fed. Reg. 34681. 

447. 29 U.S.C. § 1401(a)(3)(A). 

448. 749 F. 2d 1396 (9th Cir. 1984). 



DISPUTE RESOLUTION PROCEDURES 259 

that the trustees of the plan sponsor have an interest in establishing a large 
liability and therefore the presumption favoring their determination constitutes a 
denial of the employer's right to resolution of disputes before an impartial 
tribunal. ^^9 The court rejected this contention, finding that trustees do not have 
an institutional bias and rather have a fiduciary duty to assess withdrawal liability 
neutrally and reasonably. "^^O jhe court also noted that MPPAA carefully pres- 
cribes the methods for computing liability and allows trustees discretion solely in 
the selection of the specific method of computation to apply in a particular case. 
The court held the exercise of this limited discretion insufficient to impugn the 
impartiality of the trustee's determinations. 

The PBGC has included discovery provisions in the final regulation based lar- 
gely upon the views expressed in the comments. Discovery provisions were not 
part of the proposed regulation. The PBGC believes that fairness will often 
require that discovery be available to the parties due to the nature of the 
withdrawal disputes. ^^1 The arbitrator controls the scope of discovery. ^^2 

The arbitrator also has discretion as to the admissibility of evidence. The 
proposed rules had qualified the arbitrator's discretion, however, by requiring 
conformity to the legal rules of evidence if the rights of the parties would be 
prejudiced otherwise. The PBGC omitted the qualification from the final rules 
because it agreed with several comments that such a requirement was unnecessary, 
would invite appeals based on technicalities, and would put non-lawyer arbitrators 
at a disadvantage. ^53 

Although the arbitrator may call a prehearing conference under the final 
rules, 454 ^y^q PBGC is not authorized to do so as it suggested in the proposed 
rules. Several comments objected to the proposed authorization because it would 
too deeply involve PBGC in an essentially non-governmental arbitration. 455 

The arbitration hearing date must be no later than 50 days after the 
arbitrator accepts his appointment, unless the parties agree to proceed without a 
hearing as allowed under 2641. 4(c). 456 The proposed time limit of 30 days had 
been criticized by the comments so the provision has been extended in the final 
rules. If the parties cannot agree on a date within a 15 day period after the 
arbitrator's acceptance, the arbitrator has 10 additional days to set the date. 457 



449. The denial of the right to an impartial tribunal violates the Fifth Amend- 
ment right of due process. 

450. 749 F. 2d at 1404-1406. 

451. 50 Fed. Reg. 34631. 

452. § 2641.4(2). 

453. 50 Fed. Reg. 34681. 

454. § 2641.4(b) 

455. 50 Fed. Reg. 34681. 

456. § 2641.5(a). 

457. § 2641.5(a). 



260 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

The parties may appear In person or by counsel and will be subject to the 
arbitrator's order if they fail to appear or file documents In a timely manner. 458 
A stenographic or taped record of the proceeding will be made upon the request 
and expense of any party. ^59 The arbitrator must establish a procedure to 

allow each party full and equal opportunity to present his claims and proofs, 
cross-examine witnesses and file a brief. ^60 

The arbitrator may reopen proceedings for good cause at any time after the 
close of the hearing and before the final award is rendered. "^^l Although the 
proposed rule required the consent of both parties, the PBGC agreed with several 
comments which objected to giving the parties the power to frustrate the reopen- 
ing. '*62 The final rule, therefore, does not contain the consent requirement. 

The arbitrator must make a written award within 30 days of the close of 
proceedings. ^^63 The close of proceedings is marked by either the date the 
hearing was closed, the date the last brief or reply brief was filed, the date the 
reopened proceedings were closed, or If the parties waived a hearing, the date on 
which final statements and proofs were filed. ^^^ 

Two comments objected to the time limits on the arbitrator to render an 
award because they were unreasonably short and ambiguous. The PBGC clarified 
the ambiguity by explicitly defining what marks the closing of proceedings but did 
not adopt the time limit suggestions. The PBGC believes that the limits are ade- 
quate because it is the duty of the arbitrator to make sure before he accepts the 
appointment, that he will be able to render awards promptly after the close of 
proceedings. 46 5 

The arbitrator's final award must include a factual and legal basis for the 
his findings, adjustments for amount and schedule of payments, and a provision 
for an allocation of costs. 466 

The requirement in the final rules that the arbitrator state a factual and 
legal basis for his award is a slight revision from the proposed requirement that 
the arbitrator explicitly characterize his statements as "findings of fact" or 
"conclusions of law." Some comments argued that non-lawyer arbitrators would be 
burdened by making the proper categorization. The AAA also criticized the need 
for the arbitrator to make conclusions of law and noted, in fact, that the Federal 



458. § 2641.5(c). 

459. § 2641.5(d). 

460. § 2641.5(e). 

461. § 2641.6(a). 

462. 50 Fed. Reg. 34682. 

463. § 2641.7(b). 

464. § 2641.7(c), (d), and (f). 

465. 50 Fed. Reg. 34682. 

466. § 2641.7(a)(1), (2), and (3). 



DISPUTE RESOLUTION PROCEDURES 261 

Arbitration Act does not require it. The PBGC agreed that the requirement is of 
little value and, therefore, made clear in the final rules that the arbitrator need 
only state a factual and legal basis for the award. ^67 

After the final award has been rendered, the plan sponsors are required to 
make copies of the awards available to the PBGC and contributing employers. 468 
One comment suggested that the PBGC publish and index awards. Although the 
PBGC lacks the resources to comply with the suggestion, it does agree that the 
awards should be made public. ^^9 

The arbitrator's award is reviewable in a United States district court. ^^O 
The scope of judicial review of the award is not clear under the statute, however. 
MPPAA § 4221(b) contains two distinct references concerning judicial review of 
an award. 471 § 4221(b)(2) authorizes any party to bring an action in a district 
court in accordance with 29 U.S.C. § 1451 to enforce, vacate, or modify an 
award. 29 U.S.C. § 1451 provides that a party adversely affected by the Act may 
bring an action in a district court "for appropriate legal or equitable relief or 
both." This provision for review is modified by § 4221(c), which provides that in 
any proceeding under § 4221(b) an arbitrator's findings of fact will be presumed 
correct subject to rebuttal only by a clear preponderance of evidence. Thus § 
4221(b)(2), modified by § 4221(c) appears to authorize de novo review of all issues 
of law and review of factual findings under a clear preponderance of the evidence 
standard. This has been the conclusion of most courts which have interpreted the 
MPPAA arbitration provision. 472 

The provision for judicial review described above is confused by § 4221(b)(3). 
This section provides that to the extent consistent with MPPAA, arbitration 
proceedings are to be enforced as an arbitration carried out under the United 



467. 50 Fed. Reg. 34682. 

468. § 2641.7(g). 

469. 50 Fed. Reg. 34682. 

470. 29 U.S.C. § 1401(b). 

471. Id^ 

472. See, Board pf Trustees of the Western Conference of Teamsters Pension Plan 
v. Thompson Building Materials, 749 F. 2d 1396, 1400 (9th Cir. 1984) (Court 
interpreted MPPAA as prescribing de novo judicial review of questions of 
law, while arbitrator's findings of fact are presumed correct unless rebutted 
by a clear preponderance of evidence.); see also, Peick v. Pension Benefit 
Guaranty Corp., 742 F. 2d 1247 (7th Cir. 1983) (Court rejected contention 
that MPPAA denies employers their right to access to courts stating that, 
"Arbitration is ... merely the first step in resolving conflicts arising under 
the Act." 742 F. 2d at 1277. The court viewed MPPAA as providing a means 
for encouraging parties to settle dispute and not as a means for reaching a 
final determination.); see also I. A.M. National Pension Fund Benefit Plan C 
V. Stockton TRI Industries, 727 F. 2d 1204(D.C. Cir. 1984) (Court analogized 
MPPAA arbitration to administrative agency action and determined the scope 
of review to be equal to that accorded to administrative adjudications). 



262 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

States Arbitration Act. 473 'phg Arbitration Act provides very limited judicial re- 
view, applicable only in cases of fraud, partiality and misconduct. To date at 
least one appellate court has interpreted § 4221(b) as authorizing only the limited 
scope of judicial review provided in the United States Arbitration Act.^^** 

The courts which have interpreted MPPAA's arbitration provisions thus far 
have been called upon to determine the Act's constitutionality and have not 
actually reviewed an arbitration decision under the Act. MPPAA has been upheld 
against assertions that its provisions violate standards of due process;'*^^ deny 
employers access to an impartial tribunal;'*^^ commit a taking of property without 
just compensation;"*?? violate the Seventh Amendments provision for trial by 
jury;478 and constitute a violation of Article III of the Constitution by vesting 
federal judicial power in arbitrators who are not federal Article III judges. ^^^ 



Commodity Futures Trading Commission Reparations Procedures 

The Commodity Exchange Act of 1974'*^^ established a reparations procedure 
by which individuals alleging injury under the act as a result of a violation 
caused by a registered commodities trading professional could adjudicate their 
claim within the Commodities Futures Trading Commission. The Act offers this 
reparations procedure as an alternative to civil litigation or resort to a privately 
sponsored dispute resolution mechanism. 



473. The Washington Star Company v. International Typographical Union Negotia- 
ted Pension Plan , 729 F. 2d 1502 (D.C. Cir. 1984). 

474. 9 U.S.C. § 1 et seq. 

475. See, Pension Benefit Guaranty Corp v. R.A. Gray , 104 S.Ct. 
2709(1984)(Court held constitutional MPPAA's retroactive imposition of 
withdrawal liability). 

476. See discussion in text, Board of Trustees of the Western Conference of 
Teamsters Pension Trust Fund v. Thompson Building Materials, Inc , 749 F. 2d 
1396 (9th Cir. 1984); Washington Star Company v. International Typographical 
Union Negotiated Pension Plan , 729 F. 2d 1502(D.C. Cir. 1984); Peick~v7 
Pension Benefit Guaranty Corp. 724 F. 2d 1247 (7th Cir. 1983). 

477. Board of Trustees of the Western Conference of Teamsters Pension Trust 
Fund V. Thompson Building Materials, Inc , 749 F. 2d 1396, 1406 (9th Cir. 
1984) (Taking clause does not prohibit Congress from readjusting contractual 
relationships of private parties); accord, Peick v. Pension Benefit Guaranty 
Corp. , 724 F. 2d 1247, 1274-1276 (7th Cir. 1983). 

478. Washington Star Company v. International Typographical Union Negotiated 
Pension Plan , 729 F. 2d 1502, 1511 (D.C. Cir. 1984); Peick v. Pension Benefit 
Guaranty Corp., 724 F. 2d 1247, 1277 (7th Cir. 1983). 

479. Board of Trustees of the Western Conference of Teamsters Pension Trust 
Fund V. Thompson Building Materials, 749 F. 2d 1396, 1404-1406 (9th Cir. 1984). 

480. Pub. L. 93-463. 



DISPUTE RESOLUTION PROCEDURES 263 

The reparations procedure has processed approximately 1,000 claims each 
year since its inception in 1976.^^1 From the outset, however, CEA's repara- 
tions procedures frequently resulted in long delays and backlogs. ^^2 Because the 
procedure was not providing for expeditious, inexpensive resolution of claims as 
intended. Congress amended the reparations provision in 1982 to grant CFTC the 
power to promulgate rules, regulations, and orders necessary to provide for the 
efficient and expeditious administration of reparations claims. 483 Under this 
authority, CFTC issued reparations rules, completely revising the reparations pro- 
cedures originally established by CEA.484 CFTC's current rules create a three 
track decisionmaking procedure including a voluntary decisional procedure 
analogous to commercial arbitration, a summary decisional procedure for claims of 
up to $10,000 and a formal decisional procedure for claims exceeding $10,000. 

A person who believes he has been injured due to a registrant's violation of 
the Act may apply for reparations by filing a complaint with the proceeding clerk 
of CFTC's Office of Proceedings. ^85 This complaint must contain a description 
of the relevant facts under which the alleged violation has occurred, a claim for 
damages, and an election of one of the three decisional procedures. The Office 
of Proceedings initially reviews the complaint and either serves it upon the named 
registrant, terminates the complaint, or returns it to the complainant for correc- 
tion of deficiencies. 486 The Office of Proceedings may terminate a complaint 
only if it raises claims which are not cognizable in a reparations proceeding. 

Upon receipt of a complaint a registrant must file an answer within 45 
days. 487 The answer must contain a detailed statement of the facts which 
constitute the ground for a defense, any counterclaims, and an election of a 
decisional procedure. The answer also may include a motion for reconsideration 
of the determination to forward the complaint under which the registrant may 
request a review of the complaint for any patent defects such as a statute of 
limitations defense. The complainant is permitted thirty days in which to reply to 
any counterclaim. 488 The failure to answer a complaint or reply to a counter- 
claim acts as an admission of the allegations and waives a party's right to a deci- 
sional procedure. 489 The Office of Proceedings may designate a proceedings 
officer to enter findings of fact and conclusions of law, including a reparations 
award against a non-responding party. A default order so entered will become a 



481. Raisler, Nelson, and Wright, CFTC Reparation Rules Offer Novel Adjudication 
Angle , Legal Times, April 16, 1984. 

482. jd^ 

483. Pub. L. 97-444, 96 Stat. 2308, 7 U. S.C § 18(b). 

484. 49 Fed. Reg. 6602-6644. 

485. 17 CFR § 12.13. 

486. 17 CFR § 12.15. 

487. 17 CFR § 12.18. 

488. 17 CFR § 12.20. 

489. 17 CFR § 12.22. 



264 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

final order of the Commission unless set aside within thirty days.^^O Within 
thirty days, a proceeding officer may set aside a default order upon a party's 
showing that it has a reasonable likelihood of success on the merits and that no 
prejudice would result from proceeding to the merits of the claim. Once thirty 
days have passed and a default order has become a final order of the Commission, 
the proceeding officer may only set it aside if, in addition to showing reasonable 
likelihood of success and that no prejudice would result, a party establishes that 
the order was obtained through fraud, mistake, excusable neglect or that the 
Commission lacks jurisdiction. In either case, the proceeding officer's decision 
may be appealed to the Commission. 

Parties may pursue discovery under each of the three decisional procedures 
through requests for production of documents, serving depositions on written 
interrogatories and requests for admissions. 491 Parties may seek all relevant 
subject matter not subject to a privilege, except that tax returns and personal 
bank account records are discoverable only upon a showing that such information 
cannot be obtained by other means. A party served with a discovery request may 
seek to limit discovery through a motion for a protective order by the Office of 
Proceedings. In each of the three decisional proceedings discovery must be 
completed within a period of sixty days after the Office of Proceedings notifies 
the parties of its commencement. 

In the first year following institution of the new rules, from April 23, 1984, 
to April 30, 1985, CFTC received 441 complaints. ^92 The number of complaints 
increased over the last six months so that CFTC projects that it will receive 
approximately 500-550 complaints in fiscal year 1985. Of the 441 complaints 
received under the current rules, 125 have been forwarded for a hearing, 254 
remain pending in the Complaints Section of the Office of Proceedings and 62 
have been terminated through settlement (28) or due to a complainant's failure to 
correct deficiencies or because the claim is barred by the statute of limitations or 
other patent defense. 

Among the 125 cases forwarded for hearing, 56 have been pursued through 
the formal decisional proceeding, 46 through the summary decisional proceeding 
and in 23 cases the litigants have elected the voluntary proceedings. 

As of June, 1985, 6 of the 56 cases following the formal proceedings have 
been completed. These 6 cases were all resolved through settlement on the 
average of 119 days after the case was forwarded from the Complaints section. 
No case under the formal decisional proceedings has yet concluded through 
judgment. 



490. 17 CFR § 12.23. 

491. 17 CFR Subpart B §§ 12.30-12.36. 

492. The statistics detailing the Commission's experience under the new repara- 
tions rules are taken from a Commodities Futures Trading Commission Staff 
Document in the form of an Informational Memorandum to the Commission 
from Executive Director Molly G. Bayley, "Report to the Commission on the 
Operation of the New Reparations Rules," June 11, 1985. In addition to the 
cases processed under the new reparations rules, from April 23, 1984 to April 
30, 1985, the Commission also processed 320 reparations cases which had 
been filed prior to April 23, 1985, under the old reparations rules. 



i 



DISPUTE RESOLUTION PROCEDURES 265 

Under the summary proceedings, judgments have been reached in 4 cases out 
of the 46 forwarded to a judgment officer. In addition, one case was settled and 
another was resolved through a judgment against one party and settlement with 
the other parties. These case have concluded on an average of 47 days after the 
cases were forwarded from the Complaints section of the Office of Proceedings to 
the Hearings section. 

Of the 23 cases following the voluntary proceedings, five have been decided 
by judgment officers. These decisions have been reached an average of 40 days 
after the cases were forwarded to the judgment officer. 

In June, 1985, 254 cases were pending in the Office of Proceedings. 
Approximately 80 percent of these cases had been in the Office for less than six 
months and more than 50 percent had been in the Office for less than three 
months. The length of the time pending before a case is forwarded for a hearing 
is attributable in part to the time lags in waiting for respondents' answers and to 
the time spent waiting for complainants' to correct deficiencies in original 
complaints. 

The voluntary decisional proceeding is patterned after commercial arbitra- 
tion. ^93 This procedure is adopted only upon the consent of both the com- 
plainant and the registrant. Under this procedure the parties waive any right to 
an oral hearing and any right they may have had to receive written findings of 
fact. Commission review or judicial review. ^^'^ Upon the election of the 

voluntary proceeding, the Office of Proceedings appoints a judgment officer, who 
is an employee of CFTC to hear the claim. 495 jhis judgment officer hears all 
motions concerning discovery and upon close of discovery makes an award on the 
basis of the written documents submitted. ^96 jhe judgment officer's final 

decision contains a brief conclusion concerning any alleged violation or counter- 
claim and an award of damages without any finding of fact. 497 ^o damage 
award may exceed the amount requested as damages by a party in its pleading. 
The judgment officer's decision is final; it may not be appealed to the Commission 
or to a court although it may be enforced in a United States district court. 498 
Despite this finality, the Commission, upon its own motion, may review an award 
to determine that it is not the result of any fraud, partiality or other miscon- 
duct. 499 The judgment officer's conclusion concerning a registrant's violation of 
the Commodity Exchange Act is not a Commission finding for purposes of denying 
or revoking a person's registration under the Act; it is considered a final 
Commission order however for all other purposes and thus may have res judicata 
effect. 



493. 49 Fed. Reg. 6611; 17 CFR Subpart C, §§ 12.100-106. 

494. 17 CFR § 12.100(b). 

495. 17 CFR § 12.26(a). 

496. 17 CFR § 12.101. 

497. 17 CFR § 12.106. 

498. 17 CFR § 12.106(d). 

499. 17 CFR § 12.403(b). 



266 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

The summary decisional procedure is available for resolution of reparation 
claims of $10,000 or less. 500 in this proceeding, as in the voluntary proceeding, 
a Commission employee known as a judgment officer serves as decisionmaker. ^Ol 
The judgment officer plays a very active role In the summary procedure which 
primarily resolves disputes based upon written documentation. ^02 j\^q jud- 
gment officer rules upon discovery related motions, may conduct predeclslon 
conferences between the parties and additionally, on occasion may permit oral 
testimony either In person In Washington, D.C. or through a telephonic hear- 
ing. ^03 Oral testimony may be received only after a party shows that oral test- 
imony Is "necessary or appropriate to resolve factual Issues which are central to 
the proceeding. "504 y^e judgment officer has discretion to limit the Issues 

upon which oral testimony will be received. At the close of the evidence, the 
judgment officer must Issue an Initial decision containing brief findings of fact 
and determinations of all questions of law Including an award of damages. 505 
Upon receipt of the judgment officer's initial decision, either party may appeal to 
the Commission. If no appeal Is taken, or Is not taken within 30 days and If the 
Commission does not review the decision upon Its own motion, the judgment offi- 
cer's decision becomes a final decision of the Commission. 506 

On appeal, the Commission reviews briefs filed by the parties and may at Its 
discretion hear oral argument. 507 j^e Commission is not bound by the findings 
or determinations made by the judgment officer although it may summarily affirm 
an Initial decision which Is substantially correct. 508 xhe Commission remains 
free to make any findings or conclusions It deems warranted on the basis of the 
record developed. The Commission's decision is appealable to the United States 
Court of Appeals under § 14 of CEA where Its findings of fact are conclusive if 
supported by substantial evidence. 509 

The formal decisional procedure Is the most detailed of the reparations 
proceedings and is available for resolution of claims exceeding $10,000,510 Under 
this proceeding an administrative law judge presides over a trial-type hearing and 
decides all claims, while a proceedings officer handles prehearing motions includ- 



500. 17 CFR § 12.26(b). 

501. Id^ 

502. 49 Fed. Reg. 6613. 

503. 17 CFR § 201. 

504. 17 CFR § 12.209. 

505. 17 CFR § 12.210. 

506. 17 CFR § 12.210(d). 

507. 17 CFR § 12.401. 

508. 17 CFR § 12.406. 

509. 7 U.S.C. § 18. 

510. 17 CFR § 12.26(c). 



DISPUTE RESOLUTION PROCEDURES 267 

ing ruling upon all discovery motions. ^H A proceeding officer's decisions are 
appealable to the ALJ assigned to the case.^l^ Either the proceeding officer or 
the ALJ may preside over a prehearing conference for the purpose of narrowing 
the issues for hearing or encouraging settlement or the use of the voluntary 
decisional procedure. 513 

An administrative law judge presides over the hearing^l^ and has the power 
to dispense with oral testimony concerning any factual issues that can be 
resolved solely through review of submitted documentary evidence. ^1^ However, 
as a rule, administrative law judges are expected to allow the opportunity for full 
oral hearings. 516 At the hearing, the parties may conduct direct and cross- 
examination and introduce any documentary evidence which is relevant, material 
and reliable. 517 All hearing proceedings are recorded and transcribed under the 
supervision of the ALJ. 518 At the close of the hearing the ALJ may request the 
parties to file proposed findings of fact and conclusions of law. 519 

At the conclusion of the proceeding, the ALJ issues an initial decision 
containing findings of fact and conclusions of law. 520 jhe ALJ's decision 
becomes a final decision of the Commission unless a party appeals to the Commis- 
sion within thirty days or the Commission itself moves to hear the case. 521 xhe 
Commission's power to review an ALJ's decision is the same as its power to 
review initial decision's developed in the Summary Decisional Procedure. The 
Commission receives briefs and at its discretion hears oral argument and ultimate- 
ly may make any findings or conclusions which it determines are warranted by the 
record. A decision of the Commission is reviewable in the United States Courts 
of Appeals under § 14 of the CEA where the Commission's findings of fact are 
conclusive if supported by substantial evidence. 522 

Superfund Arbitration. 



511. 17 CFR §§ 12.300-12.304. 

512. 17 CFR § 12.302. 

513. 17 CFR § 12.303-304. 

514. 17 CFR § 12.304, 312. 

515. 17 CFR § 12.311. 

516. 49 Fed. Reg. 6616. 

517. 17 CFR § 12.312(d). 

518. 17 CFR § 12.312(f). 

519. 17 CFR § 12.312(g). 

520. 17 CFR § 12.314. 

521. 17 CFR § 12.314(d). 

522. 7 U.S.C. § 18 (1982). 



268 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

The Comprehensive Environmental Response, Compensation and Liability 
Act523 (CERCLA or Superfund) relies upon arbitration to resolve conflicts arising 
from the Environmental Protection Agency's Administrator's determinations of 
claims asserted against CERCLA's Hazardous Substance Response Trust Fund. ^24 

The Superfund Act created a Trust Fund to pay for the clean up of hazard- 
ous waste spills and disposal sites. ^25 j^e Trust Fund may be used to pay the 
federal government's costs to clean up hazardous waste sites, the costs Incurred 
by any person responding to actual or threatened hazardous substance releases 
and the costs incurred by a state or federal agency in restoring, rehabilitating or 
replacing natural resources harmed as a result of a hazardous substances re- 
lease. ^26 \ person who has responded to a hazardous substance release or a 
state responsible for restoring natural resources harmed by a release may assert 
claims against the fund whenever they have not recovered from any other poten- 
tially liable party. EPA may award claims for response costs Incurred by any 
person so long as the costs were expended in compliance with the National 
Contingency Plan of the Clean Water Act and were preauthorized by EPA. EPA 
may pay the costs incurred by a state acting as trustee of natural resources so 
long as they were expended either in accordance with a plan developed under 
CERCLA or in response to an emergency. 

Upon presentation of a claim, the EPA administrator, must attempt to 
negotiate a settlement and if unsuccessful, make an award from the fund or deny 
the claim. 527 lYie administrator must submit denied claims for arbitration. ^28 ^ 
claimant may request arbitration of an award the claimant finds unsatisfactory.529 

Under CERCLA, the President must establish a Board of Arbitrators to hear 
claims. 530 T^e members of this Board must be selected in accordance with 
procedures utilized by the American Arbitration Association. CERCLA authorizes 
an arbitrator to conduct informal public hearings and issue written decisions. 531 
The Act provides for judicial review of arbitrators' decisions in a United States 
district court. The district court is to uphold an arbitrator's decision unless It 
finds that decision constitutes an "arbitrary or capricious abuse of the members' 



523. Pub. L. 96-510; 94 Stat. 2767 (1980); 42 U. S.C. 9601 et. seq, 

524. The arbitration provision is found in Sec. 112(b)(4). 

525. 42 U.S.C 9631-33. 

526. CERCLA Sec. lli(a). 

527. CERCLA Sec. 112(b)(2)-(3). 

528. CERCLA Sec. 112(b)(3). 

529. Id^ 

530. CERCLA Sec. 112(b)(4)(A). 

531. CERCLA Sec. 112(b)(4)(B)-(D). 



DISPUTE RESOLUTION PROCEDURES 269 

discretion. "532 

The Environmental Protection Agency issued a proposed rule to establish 
procedures for the conduct of arbitration on March 8, 1985,^33 followed by a 
60-day comment period. EPA made minor alterations to the rule and published 
the final rule on December 13, 1985. ^^^ The rule provides that the EPA Adminis- 
trator will appoint the members of the Board of Arbitrators. ^35 -phe Adminis- 
trator will screen applicants for membership to the Board by evaluating such 
criteria as background in hazardous substances or administrative procedures. ^36 
In compliance with CERCLA, the Administrator will forward the names and 
qualifications of those applicants he selected to the American Arbitration Asso- 
ciation (AAA). 537 If lY^Q applicant meets the requirements of AAA, his name aIU 
be returned to the Administrator for possible appointment to the Board. 538 Board 
members will receive three year appointments and serve at the pleasure of the 
Administrator. Board members may be removed for any reason the Administrator 
deems appropriate except that a member may not be dismissed during the pend- 
ency of a claim in the absence of a showing of bias, personal or financial in- 
terest. The total number of arbitrators or board members will be determined by 
the Administrator. 

A member of the Board may arbitrate a claim in one of two situations: (l) 
whenever the Administrator denies a claim; or (2) whenever a person dissatisfied 
with an award requests arbitration. The arbitrator may only make awards which 
are compensable from the Fund under CERCLA's complex scheme. Thus the arbi- 
trator may not award claims which would reverse EPA decisions concerning the 
preauthorization of claims under the National Oil and Hazardous Substances 
Contingency Plan and may not award costs for the harm caused to natural re- 
sources unless the costs are distributed under a plan developed under CERCLA or 
were expended in response to an emergency. 539 

The proposed rule limits the arbitrator's role to fact finding. 540 i^ deciding 
a claim, the Board must apply legal standards as prescribed by EPA in the 
"summary of applicable standards and principles" which EPA must develop for each 
claim. 541 jhe rule also directs the Board to accord "substantial deference to EPA 



532. CERCLA Sec. 112(b)(4)(G). 

533. 50 Fed. Reg. 9586. 

534. 50 Fed. Reg. 51196. 

535. 40 CFR 305.20(a). 

536. 40 CFR 305.20(b). 

537. 40 CFR 305.20(b). 

538. Id. 

539. See 40 CFR 305.21. 

540. 50 Fed. Reg. 51198. 

541. 40 CFR 305.21(g). 



270 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

decisions as reflected In the administrative record. "542 Additionally, the rule 
absolutely prohibits the Board from reviewing an Administrator's decision to deny 
a claim whenever that decision Is made "based on competing priorities for the 
expenditure of Fund monies. "^43 Finally, claims by other federal agencies are not 
eligible for adjudication by the Board. 544 

The Administrator must submit all denied claims to the American Arbitration 
Association within five days. 545 jYie Administrator must include with this denial 
an explanation of the decision, a statement of the legal standard applicable to the 
claim, any other supporting documentation which EPA deems necessary to explain 
the reason for denial and, if known, the identity of any potentially responsible 
parties. At this time the Administrator may also request AAA to use expedited 
procedures to hear any claim involving $20,000 or less. 546 

A claimant dissatisfied with the Administrator's award may initiate arbitra- 
tion by submitting the claim to AAA within 30 days of the Administrator's 
decision. 547 The claimant's submission must include an explanation of the matter 
and amount in dispute, and the remedy sought. The claimant must also include a 
copy of the Administrator's decision, any supporting documents the claimant deems 
necessary to support its claim and the identity of any potentially liable parties, if 
known. 548 Within 5 days of receipt of a claim, AAA must notify the other party 
of the dispute's existence by sending that party a copy of the claim. 549 

Once the claim has been submitted, AAA will distribute to the parties a list 
of potential arbitrators drawn from the Board of Arbitrators. 550 After the parties 
have an opportunity to rate these members in order of preference, AAA will 
invite the parties to accept one arbitrator from the list to hear the claim. If the 
parties do not agree upon an arbitrator, AAA may appoint a member to hear a 
claim. Arbitrators must immediately disclose to AAA any circumstances likely to 
affect impartiality including any bias or personal or financial interest or past 
relationship with the parties, their counsel, or any potentially responsible par- 
ty. 551 AAA will share this information with the parties but retains sole discre- 
tion to decide whether an arbitrator should be disqualified due to bias or interest. 

The responding party to an arbitration has seven days after receipt of the 



542. 40 CFR 305.21(h). 

543. 40 CFR 305.21(f). 

544. 50 F.R. 51199. 

545. 40 CFR 305.30(a). 

546. 40 CFR 305.30(b). 

547. 40 CFR 305.30(a). 

548. 40 CFR 305.30(c). 

549. 40 CFR 305.30(d). 

550. 40 CFR 305.31. 

551. 40 CFR 305.32. 



DISPUTE RESOLUTION PROCEDURES 271 

notice of the claim to file an answer. ^^2 jf arbitration is initiated by a claimant, 
EPA must file a statement detailing the applicable legal standards and principles 
governing the dispute. Either party may file an amended pleading after arbitra- 
tion has been initiated, however, once the arbitrator has been appointed new 
claims may only be added with the arbitrator's consent. 553 whenever an amended 
pleading is filed, the other party has seven days from the date of receipt of such 
pleading in which to file an answer. 

Either the arbitrator or the parties may request a prehearing conference. 554 
At such a conference the parties are expected to arrange for the exchange of 
information, including witness statements, exhibits and documents, and to stipulate 
to uncontested facts in an effort to expedite the proceeding. Arbitrators may 
encourage further settlement discussions during the prehearing conference to 
expedite the arbitration proceedings. 555 jhe hearing must take place at a 

site selected by the administrator with due consideration to any requests by the 
claimants and it must occur no more than 60 days after the arbitrator's appoint- 
ment, 556 The arbitrator is responsible for making a full record of the hearing 
proceedings. The hearing consists of direct examination of witnesses, cross- 
examination and the submission of documentary proof. The parties may offer any 
evidence they wish, subject to reasonable limits established by the arbitrator. 
The arbitrator may receive the evidence of witnesses by affidavit, interrogatory, 
or deposition. If the arbitrator determines that an inspection or investigation is 
necessary, the arbitrator may request that the Administrator conduct an investi- 
gation or inspection under CERCLA § 104(b). The administrator decides whether 
or not to go forward with such an investigation or inspection. 

The arbitration may even proceed in the absence of any party, who after 
due notice fails to be present, fails to obtain an adjournment, or fails to have 
evidence presented on his behalf. The party will be deemed to be in default and 
the arbitrator will require the party who is present to submit such evidence 
necessary for the arbitration to make an award. 557 

After the parties have completed their presentations the arbitrator may close 
the hearing, or request the submission of briefs or additional documents. 

The arbitrator must make his decision within 90 days of the submission of 
the claim to the Board. 558 This period may be extended upon consent of all 
parties or by the Administrator when a large number of claims arising from a 
single incident or set of incidents have been consolidated for hearing. The 
arbitrator's decision must be written and contain a full statement of the basis and 
rationale for the arbitrator's determination. 



552. 40 CFR 305.40. 

553. 40 CFR 305.40(b). 

554. 40 CFR 305.41. 

555. 40 CFR 305.41. 

556. 40 CFR 305.42. 

557. 40 CFR 305.42(i). 

558. 40 CFR 305.43(a). 



272 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

Expedited procedures are used to resolve claims that do not exceed $20,000, 
unless the Administrator demands full procedures. ^^^ In addition, the parties may 
consent to the use of expedited procedures to resolve claims of more than 
120,000. The $20,000 figure refers to the amount in dispute between the claimant 
and EPA, regardless of the amount of the original claim. ^^^ The expedited 
procedures differ from the full arbitration procedures in that the parties agree to 
receive all required notices by telephone, followed by written confirmation. In 
addition, the arbitrator selection process Is streamlined In that AAA submits a list 
of five potential arbitrators to each party from which each party may strike two. 
AAA will then appoint an arbitrator who will serve, subject to any finding of 
partiality, bias or Interest requiring disqualification. The hearing must commence 
within 60 days of the selection of the arbitrator. Most expedited cases will be 
heard within one day. The arbitrator's decision is due five days after the close 
of the hearing unless the parties agree to an extension. 

The arbitrator's decision, whether rendered under the full procedures or 
under the expedited procedures, may be appealed to the United States district 
court In the district In which the arbitration took place. ^^^ CERCLA Instructs 
the courts that an award or decision of a member of the Board is binding and 
conclusive and Is not to be overturned except in cases of arbitrary or capricious 
abuse of the member's discretion. CERCLA further provides that the arbitrator's 
decision Is to have no collateral effect. An arbitrator's award Is not admissible 
as evidence of any Issue of fact or law In any other proceeding under CERCLA or 
any other provision of law.^^^ 

Finally, § 305.52 of the final rules Includes additional miscellaneous provis- 
ions. Parties to arbitration must make objections, whether oral or written, at the 
earliest possible opportunity or will be deemed to have waived the right to ob- 
ject. ^^3 The final rules also forbid the Administrator, the parties and other 

interested persons from engaging in ex parte communication with the arbitra- 
tor. ^64 



Merit Systems Protection Board. 

Background. Congress passed the Civil Service Reform Act of 1978 (CSRA or 
Act),^^^ to promote a more efficient "civil service while preserving the merit 



559. 40 CFR 305.50(a). 

560. 50 Fed. Reg. 51200. 



561. CERCLA Sec. 112(b)(4)(G); 40 CFR 305.51(b). 

562. jd^ 

563. 40 CFR 305.52(a). 

564. 40 CFR 305.52(b). 

565. 5 U.S.C. m 1101-8911 (Supp. IV 1980). 



I 



DISPUTE RESOLUTION PROCEDURES 273 

principle in Federal employment. "566 jhe Act abolished the Civil Service 
Commission and replaced it with the Merit Systems Protection Board (MSPB or 
Board). Under the CSRA, the Board is an independent, quasi- judicial regulatory 
agency created to protect the Federal merit systems from political abuse and to 
resolve employee grievances within the systems. ^6''' 

To resolve employee grievances, the MSPB began with a formal appeals 
procedure (FAP) established under the CSRA. The Board, however, examined 
alternatives to the FAP because of Congressional interest in expediting the 
personnel actions subject to the Board's appellate jurisdiction. ^68 illustrative of 
Congressional intent is the Senate report, accompanying CSRA, urging the MSPB 
to develop alternative methods for resolving appealable matters including "suitable 
forms of conciliation, mediation, arbitration, and other methods mutually agreeable 
to the parties. "569 

In 1981, a new chairman of MSPB, familiar with "expedited arbitration" as 
used by unions, began to focus discussion on that procedure as interest in it 
increased during the Air Traffic Controllers (ATC) union strike. The appeals from 
the strikers, terminated from federal employment, eventually increased threefold 
the FY 81 caseload of the MSPB.570 With the assistance of the Administrative 
Conference of the United States (ACUS), the MSPB began development of what 
became the "Appeals Arbitration Procedure" (AAP). The AAP, later modified as 
the "Voluntary Expedited Appeals Procedure" (VEAP), is an alternative to the 
more formal appeal procedure (FAP). The Board's objective was to design an 
informal, simplified, less costly system to adjudicate routine, non-precedential 
appeals while preserving fair, impartial forums. The Board's expectations are 
reflected in its statement of goals and objectives: 

• The system will not only be fair and fast, but also one which is 
recognized and accepted as such by employees and agency management. 

• It will encourage the informal resolution of disputes in the proceeding, 
including settlement by agreement between the parties. 

• It will cover as many kinds of appealable matters as are feasible for 
resolution through the more informal process. 

• It will improve the timeliness and cost-effectiveness of the process 
leading to the resolution of disputed personnel actions. 



566. S. Rep. No. 969, 95th Cong., 2d Sess. 2, reprinted in 1978 U.S. Code Cong, 
and Ad. News 2723, 2724 (hereinafter, S. Rep. No. 969). 

567. S. Rep. No. 969. The powers and functions of the MSPB are set out in 5 
U.S.C. § 1205 (Supp. IV 1980). 

568. Pub. L. 95-454, 92, Stat. 1111 (1078). 

569. S. Rep. No. 969. 

570. In Fiscal 1981, the MSPB issued 5,610 decisions at the regional level as part 
of the regular caseload and received 10,356 Air Traffic Controller Appeals. 
U.S. Merit Systems Protection Board, Study of MSPB Appeals Decisions In 
FY 1981, December 1982 cited in Adams, supra note 170. 



274 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

• It will exclude sensitive cases requiring more intense adjudicative 
proceedings, based on the nature, gravity and complexity of the issues 
involved. 

• It will preserve the parties' rights to limited Board review of major 
procedural and legal errors in the arbitration award. ^"^^ 

The MSPB introduced its proposal for the AAP in October 1982 to Federal 
agencies, unions, bar associations, and public interest groups. ^^2 Comments were 
requested and received in December 1982. MSPB modified the plan after review- 
ing comments and distributed a new version. Bulletin No. 12, for public comment 
on January 13. MSPB received comments on Bulletin No. 12 through January and 
February and published interim final rules effective in the Federal Register on 
March 18, 1983, announcing the introduction of appeals arbitration (AAP), and a 
pilot study of the procedure to be conducted in four MSPB regions. ^^^ Comments 
were Invited through July 1, 1983. The preamble to the interim rules did not 
discuss the comments MSPB received nor reasons for changes from the earlier 
drafts. 

Several important revisions of the early proposals were included in the 
interim final rules. 

MSPB originally took the position that the AAP would only be available to 
those appellants who were not members of a certified collective bargaining unit. 
The major concern of union comments was that it would be "discriminatory" and 
"anti-union" to only provide AAP to non-union members. In the interim final 
rules, MSPB extended AAP eligibility to include the union appellants. 
Perhaps the most important revision from the agency's viewpoint was the proposal 
in Bulletin No. 12, and retained in the interim rules, to allow agencies a choice in 
whether AAP would be used. Originally, agencies would have been required to 
participate in AAP if the Regional Director so directed. All but one agency 
commented that agency agreement should be necessary. Unions still favored 
unilateral election of the AAP by the employee. ^'^'^ MSPB compromised in Bulletin 
No. 12 in proposing that if an employee elected AAP, the final decision would be 
made by the Regional Director after review of the petition for appeal and the 
agency's response. 

Another revision involved the parties' right to petition the full Board for a 
review of the initial decision. Initially MSPB proposed that the Board would not 
reconsider any AAP case with the exception of those requested by the Office of 
Personnel Management. Other appellants could file civil suits from the arbitration 
decision with a Circuit Court of Appeals or with the U.S. Court of Claims. Both 
agencies and unions, in their comments, objected to the lack of appeal to the 
Board. In Bulletin No. 12, the MSPB proposed a change allowing either party to 



571. Merit Systems Protection Board, 48 Fed. Reg. 11399. 

572. The packet was entitled Voluntary Arbitration; An Alternative to Resolution 
of Employee Appeals. 

573. 48 Fed. Reg. 11399. The four MSPB cities were San Francisco, Chicago, 
Seattle, and Denver. Dallas later joined the pilot program. 

574. Lawson, Roseann, Evaluation of the Merit Systems Protection Board's Appeals 
Arbitration Procedure, p. 11. 



DISPUTE RESOLUTION PROCEDURES 275 

file a petition for review to the full Board if the party could (1) demonstrate 
harmful procedural irregularity in the proceedings before the arbitration, or (2) 
demonstrate clear error of law. 5*^5 jhe interim rules retained this change. 

Appeals Arbitration Procedure. The election of the AAP begins with the 
agency's notice of proposed action. The notice explains to the employee his right 
to appeal and his option of using the FA? or AAP. The employee has 20 days to 
appeal and has two chances to request appeals arbitration; first, at the time of 
filing a petition for appeal, or, second, within 10 days from the date of the 
Board's order of acknowledgement to the agency. The agency has 15 days from 
the date of the Board's order to consent or decline to use AAP. Upon consent- 
ing, the agency must file a designation of representative form and a summary of 
facts and legal issues raised in the appeal. Final decision to process the case 
under AAP or the FAP is left to the regional director after review of the petition 
for appeal and the agency's response. The regional director or his designee re- 
tains the right to convert the case to a formal appeals procedure (FAP), at any 
time prior to issuance of the arbitration award, in the event circumstances 
warrant. ^"^^ 

If the appeals arbitration procedure is granted, the regional director will 
appoint an arbitrator, on a rotating basis, from a panel of presiding officials who 
are designated for the new procedures and have received special training. ^"^"^ 

The initial role of the presiding official is that of mediator; to explore the 
potential for a settlement and to encourage the parties to settle the case 
voluntarily. If an informal settlement cannot be reached, the presiding official 
will assume the role of arbitrator and proceed with the hearing if one has been 
requested. The parties may still reach a voluntary settlement agreement at any 
time until the issuance of an arbitration award. ^"^^ If the parties voluntarily 
resolve the dispute without an award, the settlement agreement is final and 
binding and the appeal will be dismissed with prejudice. If the terms are re- 
corded and signed, they will be made part of the arbitration record and the Board 
will retain jurisdiction to ensure compliance with the agreement. If the settle- 
ment is not recorded, the Board will not retain jurisdiction to ensure com- 
pliance. ^79 The presiding official has the authority to take all necessary action 
to conduct a speedy, fair, and impartial hearing and, unless expressly provided 
otherwise in the regulations, to follow the regulations under 5 CFR Part 1201, 
Subpart B.580 

Unique to the AAP is the requirement of both parties to file a Joint 



575. The formal appeals procedures (FAP) uses the less restrictive review stan- 
dard: "contrary to law, rule or regulation." 

576. § 1201.201(a)(b)(c). 

577. 48 Fed. Reg. 11399. The training of presiding officials and regional directors 
for the four pilot study sites was held at MSPB headquarters in Washington, 
D.C. on March 14 and 15, 1983, three days prior to the introduction of the program. 

578. § 1201.216(a). 

579. § 1201.216(b)(l)(2). 

580. § 1201.204 (C)(D). 



276 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

Arbitration Record (JAR) with the purpose of bringing the parties together to 
narrow and focus the Issues in dispute. The JAR is to be filed within 30 days 
from the date of the Board's order of acknowledgement and should include a 
statement of issues, witness lists, a request for hearing and two possible dates for 
the hearing. 581 Informal discovery will usually precede preparation of the JAR. 
While the rights to formal discovery are waived by the parties in electing to use 
the AAP instead of the FAP, the parties have the duty to include all known 
relevant materials with their submissions. ^82 

Either party may request a hearing which is to be held at the employment 
site and must be scheduled within a 15-day period following the due date, or 
receipt, of the JAR. 583 jhg ^AP hearing is similar to but more informal than 
that under the FAP. Formal rules of procedure do not apply but may be liberally 
construed and used as a guide to admissibility of evidence, motions, filings of 
briefs, etc. 584 

Agencies are required to make their employees available as witnesses when 
requested by the presiding official. 585 xhe arbitrator may also request the 
production of additional information or witnesses if needed for resolution of the 
matter. 586 jn the event a party fails to cooperate, the presiding official may 
impose appropriate sanctions. 587 

Unlike the Formal Appeals Procedure, MSPB keeps no official transcript of 
the AAP hearing, although the parties may provide for an unofficial one with use 
of a tape recorder or court reporter. 

The record is closed at either (a) the conclusion of the hearing or, if no 
hearing has been convened, (b) on the date set for receipt of submissions of the 
parties. The presiding official has discretion to accept additional evidence or 
arguments after the closing of the record if it can be shown that the new and 
material evidence was not available prior to closing of the record. 588 

The presiding official is to issue the arbitration award no later than 30 days 
from the date the JAR was received by the Board, (60 days from the date of the 
acknowledgement order) which is half the time allowed under the FAP. 589 jf no 
hearing was conducted and settlement was not reached, the presiding official is to 



581. § 1201.202(c). 

582. 48 Fed. Reg. 11400. 

583. § 1201.205(a)(c). 

584. 48 Fed. Reg. 11400. 

585. § 1201.206(a). 

586. 48 Fed. Reg. 11400. 

587. 8 1201.213. 

588. 8 1201.215(a)(b)(c). 

589. 8 1201.204(b). 



DISPUTE RESOLUTION PROCEDURES 277 

issue a written decision within 15 days after the record is closed. 590 -phe 
decision is to be briefer in scope than it is under the FAP due to its non-prece- 
dential character and reliance on the joint record. It is to include a summary of 
the basic issues, findings of fact and conclusions of law, a holding affirming, 
revising or modifying the appealed action, and an order of appropriate relief. 591 
The award will become final after 35 days if no petition for review is filed. ^92 

Under the interim rules, the Board would grant only a limited review of the 
decision of the presiding official. By electing the AAP, the parties waived their 
right, which was available under the FAP, to petition for review on grounds of 
new and material evidence. 593 The Board would only grant review of a petition 
which established: (a) demonstrated harmful procedural irregularity in the 
proceedings before the arbitrator, or (b) clear error of law. The Board will issue 
a final decision no later than 15 days from the close of the respondent's filing 
deadline. The appellant retains the right under the AAP to file an appeal of the 
final order or decision of the Board with the U.S. Court of Appeals. 594 

Voluntary Expedited Appeals Procedure . In response to early evaluation 
findings, the MSPB made several modifications to the AAP in July 1984, before 
the pilot study was completed. First, the name of the AAP was changed to "the 
voluntary expedited appeals procedure" (VEAP) to reduce the confusion of the 
AAP with labor arbitration and to emphasize the parties' right of choice. Second, 
the MSPB also changed the standard of review of VEAP decisions to be uniform 
with those of the FAP to ensure fairness regardless of forum. Finally, the MSPB 
extended the time allowed for its final decision on a petition for review from 15 
to 35 days to conform to that permitted by FAP. 595 

Evaluation of Appeals Arbitration. The success of the AAP program can be 
measured by using the MSPB's statement of goals and objectives for the AAP as a 
basis for evaluation. It reflects an interest in providing federal employees and 
agencies with a more expeditious, less costly means of resolving personnel 
disputes while also affording a fair, impartial forum for hearing these disputes. 
From the MSPB perspective, employee rights should be balanced against the 
efficiency of the system. 596 xhe MSPB would also measure success by the 



590. § 1201.217. 

591. § 1201.217. 

592. § 1201.217. 

593. The waiver requirement was dropped in July, 1984 as a result of the AAP's 
modification. 

594. § 1201.221. 

595. The provisions for judicial review are found in 5 U.S.C. § 7703. 

596. Meeting of Roseann Lawson and Paul D. Mahoney,, Assistant Managing 
Director for Management, MSPB, April 19, 1983. Cited in Lawson, Evaluation 
of the Merit Systems Protection Board's Appeals Arbitration Procedure s, Part 
II - Introduction, p. 19. 



278 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

number of parties who use the procedure time after time.^^' 

At the onset of the program, agencies and appellants shared the concern 
that procedural and substantive equity might be affected In an expedited proce- 
dure and would measure success by fairness to the parties. They would consider 
the procedure a success If the elements of "due process" were preserved while 
ensuring that the outcomes remain consistent to those of the more formal 
procedure. ^98 one attorney, who represented employees, believed that to be suc- 
cessful and fair, decisions of presiding officials should reflect the facts and 
Issues raised in the JAR and In the proceedings. ^^^ Another commentator 
suggested that the AAP will be successful if It Is attractive and workable for 
inexperienced representatives and pro se appellants. ^^^ Another appellant's 
attorney believed that for the AAP to be a success, the presiding officials' awards 
should withstand Judicial review. ^^^ Finally, from the Congressional perspective, 
the AAP would be labeled successful If the procedure could get away from the 

confrontational mode that exists at present and if the procedure could reduce 
costs. 602 

A study evaluating the AAP pilot program was conducted by the Public 
Policy Program of the George Washington University under contract with the 
Administrative Conference of the United States. The study was conducted to 
evaluate the success of the AAP In achieving the objectives mentioned above. It 
focused on measures of timeliness, cost effectiveness, equity and fairness. The 
following Is a summary of the study's findings and recommendations. 

The study applied a classic evaluation model by treating all AAP appeals 
cases as members of the experimental group matched against a control group 
consisting of similar FAP cases in the same regional site. The FAP cases used in 
matching were chosen from those that were eligible for the AAP but instead 
followed the FAP. The guidelines used for matching encouraged selection of FAP 
cases which would have used roughly the same resources if converted to AAP.^^^ 
The study intended to isolate the true effects of the AAP. 

The matching process began on July 1, 1983, in the four MSPB regions, and 



597. Paul Trayers, Labor Counsel, MSPB at MSPB Training Session, March 15 and 
16, 1983. Lawson, p. 19. 

598. Adams, supra note 170 at 37. 

599. Interview with Joseph Gebhardt, attorney practicing before the Board, May 2, 
1983. Lawson, p. 19. 

600. Edward Passman, attorney practicing before the Board in April 18, 1983 
article in Federal Times . Lawson, p. 20. 

601. Interview with Joseph B. Scott, attorney practicing before the MSPB, May 
18, 1985. Lawson, p. 20. 

602. Interview with James Cowen, Chief Counsel, Subcommittee on Civil Service 
and General Services, Senate Government Affairs Committee at the time of 
the debate and passage of the Civil Service Reform Act. Mr. Cowen was the 
minority counsel to the Subcommittee. Lawson p. 21. 

603. Adams, supra note 170 at 41. 



DISPUTE RESOLUTION PROCEDURES 279 

then after October 1, 1983, in the Dallas region which joined the pilot program 
late. The matching stopped on March 31, 1984. Fifty-four appeals cases formed 
the experimental groups. ^^^ 

The data used to develop the measures of the AAP's timeliness, cost-effect- 
iveness, and equity and fairness were drawn from administrative records and 
surveys. The observed differences between the two groups in the four measures 
of success were tested statistically to determine if they reflect differences due to 
the appeals procedures used or merely differences due to random error. ^05 jhe 
statistical findings were supplemented by field observations of the implementation 
of the AAP. 

Implementation of the AAP. The study assessed how faithfully the design of 
the AAP program had been followed in the field and examined departures from 
the design to measure the impact on the program's success. 

The results were mixed. The MSPB found that it could increase the number 
of parties exposed to AAP by being flexible in allowing parties to use the AAP 
even after the election time expired. As a consequence, however, the presiding 
officials and the parties themselves felt extra pressure to meet the 60 day sche- 
dule. ^^^ The MSPB was also flexible in solving the logistical problems of creating 
a JAR by allowing the parties to submit separate statements. 607 

The presiding officials varied in their emphasis on their roles as mediators in 
effectively facilitating voluntary settlements. 608 xhe study group has recom- 
mended more extensive training of the presiding officials. 

The study also found that the regions applied different AAP eligibility stan- 
dards. San Francisco, for example, was very strict in accepting the expediting 
appeals cases and in closing the appellants' ten-day window for electing AAP. 
The study group has recommended setting a uniform standard closer to the more 
flexible one applied in Chicago and Dallas. 609 The experience in Chicago indi- 
cated that persistent outreach efforts by MSPB officials also can significantly 
increase the number of agencies and appellants electing to use the AAP. During 
the 18 month study, only 102 appeals, just over two percent, of 4,475 appeals 
filed, were processed under the AAP and VEAP. Chicago handled 59.3% of the 
total. 

Timeliness and Cost-Effectiveness. The study found that the AAP is 



604. The distribution of appeals was as follows: Chicago - 32, Dallas - 4, Denver 
- 1, San Francisco - 15, and Seattle - 2. 

605. The statistical procedure employed was a "pair wise test of mean differences 
for correlated samples" from T. H., Wonnacott and R. J. Wonnacott, Intro- 
ductory Statistics, 2nd ed., New York: John Wiley and Sons, Inc., 1972, pp. 
171-173. Adams, supra note 170 at 58. 

606. Adams, supra note 170 at 92. 

607. Id. at 62. 

608. JW. at 92. 

609. Id. 



280 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

unequivocally more expeditious than the FAP. The AAP cases in the pilot study 
were processed in less than half the time of their matched FAP cases. ^10 Also, 
the odds of cases reaching voluntary settlement are one out of seven, which is 
better than twice those in similar FAP cases. ^^^ 

For the MSPB, the AAP is clearly cost-effective at a savings of over 40 
percent per case. The agencies have also found the procedure to be less costly 
in cases where travel was required, where a hearing was requested and witnesses 
called, and when there was an interest in voluntary settlement. ^12 j-y^Q savings 
for the appellants was difficult to judge due to the variance among the appeals 
observed. The difference from the FAP is not statistically significant for that 
group. 

Equity and Fairness. The study focused on whether the gains of cost-ef- 
fectiveness and time came at the expense of equity and fairness in both substance 
and procedure. These issues were examined using data drawn from administrative 
records and mail survey of experimental and control groups. 

One of the most important concerns of agencies and appellants was whether 
the AAP decisions would be consistent with those under the FAP. The study 
made an indirect test by describing the likelihood that the appeals decision would 
support the initial agency decision in matched AAP and FAP cases. No difference 
in the outcome was observed. 613 

Another measure of equity was whether AAP was more accessible to appel- 
lants who wished to represent themselves. The results do not point to pro se 
appellants' ready adoption of the AAP where only 25% of the experimental (AAP) 
group involved pro se appellants compared to 39% pro se appellants in the control 
group and 29% pro se appellants in a larger group of FAP cases in the five study 
sites. 61^ The study recognizes that appellants have strong incentives under both 
procedures to employ counsel. 

Another measure of equity is the parties' continued willingness to use the 
AAP. While the evidence does not indicate a steady increase in the number of 
appeals adjudicated under the AAP, it does show a continued willingness to use 
the procedure. In Chicago for example, at least seven agencies consented to use 
the AAP a second time after using it once. 615 xhe reason the overall number of 
cases adjudicated under the AAP remained low was that many of the agencies 
were reluctant to try the AAP at all. Throughout the pilot study, agencies in 
three study sites for example consented to use the AAP in little more than ten 
percent of the appeals eligible whereas appellants consented in no fewer than 25% 



610. jd. at 95. 

611. jd. at 96. 

612. jd. at 121. 

613. jd. at 120. 

614. jd. at 127. 

615. Id. at 130. 



DISPUTE RESOLUTION PROCEDURES 281 



of the cases. 



616 



Both the appellants and the agencies who used the AAP were also relatively 
satisfied with the fairness of the various procedural steps of the AAP. The first 
procedural step examined was the preparation of the Joint Arbitration Record 
which is unique to the AAP and intended to bring the sides together to reduce 
and focus the areas of dispute. The presiding official's response was that the 
JAR worked "reasonably" well despite initial logistical problems. The agencies and 
appellants also agreed that the JAR expressed all the important facts and issues 
but more so from the agency's perspective than the appellants'. 

Initially, the parties had expressed concern about the AAP's requirement that 
they waive their rights to formal discovery which is available, if necessary, under 
the FAP. The parties' response to the study's questionnaire revealed that less 
than half of the appellants felt they were able to obtain the information needed 
to prepare the JAR while six out of ten agency representatives either agreed or 
strongly agreed that they were able to get the needed information. In comparison 
to the responses from the FAP group, the AAP fared well although the difference 
is not statistically significant. ^^"^ 

The parties were also satisfied with the use of the informal hearing under 
the AAP. There is no significant difference in satisfaction between the AAP and 
FAP in this respect. This response is consistent with the presiding officials' 
observations that they had already considered the FAP hearings to be rather 
informal. 

Finally, there was some concern that fairness might be sacrificed in the 
expedited schedule that parties are required to follow in presenting their case. 
Although the parties responded favorably to the question of whether the AAP 
allowed enough time for presenting an appeal, their satisfaction is significantly 
less than the parties appealing under the FAP.^^^ 

The study found that the parties' general perception was that the AAP was 
fair and equitable. Seventy-six percent of the appellants strongly agreed or 
agreed that the AAP was equitable and eighty percent of the agency representa- 
tives reached the same conclusion. ^^^ A comparison of these responses to the 
responses from the control group showed no statistical difference in the level of 
the parties' satisfaction. 



616. Id. 

617. Id. at 136. 

618. Id. at 141. 

619. Id. at 142. 



282 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

APPENDIX III 
AGENCY OVERSIGHT OF PRIVATE DISPUTE RESOLUTION MECHANISMS 

Securities and Exchange Commission Oversight of Self Regulatory Organisations 

The Securities and Exchange Commission oversees the activities of the 
national securities exchanges and the over the counter securities markets. The 
SEC's relationship with the exchanges is referred to as self-regulation oversight. 
As one commentator notes: 

Under a commonly held perception of this relationship, the 
exchanges and the National Association of Securities Dealers 
(NASD) supervise their respective markets while the Com- 
mission asserts its reserve power only if the SRO's (self- 
regulatory organizations) initial exercise of authority is 
inadequate. ^20 

In an often quoted passage William O. Douglas, one-time Chairman of the 
SEC and later Supreme Court Justice describes the relationship between the 
exchanges and the SEC: 

The exchanges would take the leadership with Government 
playing a residual role. Government would keep the shotgun, 
so to speak, behind the door, loaded, well oiled, cleaned, 
ready for use but with the hope it would never have to be 
used."^^ 

This general description of the SEC's role in the regulation of securities 
markets may understate the central position the SEC actually holds in the field of 
securities regulation. Although the emphasis is upon self-regulation, the SEC 
plays more than a residual role. The SEC's power over this self regulation is 
clearly set forth in the Securities Reform Act of 1975. This Act sanctioned the 
Commission's broad authority over the exchanges. An exchange must apply to the 
Commission to register as a national securities exchange. ^^2 -phe Commission is 
also empowered to "abrogate, add to, and delete from the rules of a self-regula- 
tory organization as may be necessary to insure the fair administration of the 
SRC and to insure compliance with the Securities Exchange Act.''623 fhe 

Commission must also receive notice of all disciplinary actions taken by SRO's 
against their members and is empowered to review these actions. The Commission 
may also review denials of membership or participation in an SRO. Finally, the 
Commission may suspend, revoke, censure or impose limitations upon the activity 
of an SRO if it finds "after notice and opportunity for hearing, that such 
self-regulatory organization has violated or is unable to comply" with the 
Securities Exchange Act or rules promulgated under it, or the SRO's own rules. 



620. David A. Lipton, The SEC or the Exchanges: Who Should Do What and 
When? A Proposal to Allocate Regulatory Responsibilities for Securities 
Markets, 16 UC Davis LR 527, 528 (1983). 

621. Id. quoting W. Douglas, Democracy and Finance 82 (1940) (speech delivered 
on May 20, 1938). 

622. 15 U.S.C. 78s(b)(l). 

623. 15 use 78s(c). 



DISPUTE RESOLUTION PROCEDURES 283 

The Commission also may at its discretion conduct investigations to determine 
whether any person has violated, is violating or is about to violate any provision 
of the Security Exchange Act, its rules or the rules of a National Securities 
Exchange. The Commission may not, however, seek an injunction or mandamus 
order against any person for violation of a rule of a national securities exchange 
unless that exchange is unable or unwilling or otherwise has not taken such 
action. 624 Thus the Commission has significant power with which to exercise 
oversight over the self-regulatory organizations. 

An example of the interaction between the Commission and the exchanges is 
the experience of the SEC's encouragement of the use of arbitration for the 
resolution of disputes between registered broker-dealers and their customers. 
Binding arbitration clauses are not enforceable with respect to Federal Securities 
laws, 625 but the Commission has strongly endorsed the use of "fairly administered 
arbitration procedures as the most cost effective means of resolving certain 
disputes between broker-dealers and their customers. "626 

On June 9, 1976, the Commission invited comments concerning the develop- 
ment of a nationwide dispute settlement procedure for resolving disputes between 
registered securities broker-dealers and their customers. 627 -phe Commission 
sought to establish a uniform system for resolving disputes involving small claims 
to be administered by the SROs. The Commission explained "this system could 
provide for the efficient and economical disposition of grievances and should not 
be burdensome, complex or costly to the investor; in other words, the system 
could function in a manner similar to a small claims court." The Commission 
anticipated that "a streamlined dispute grievance procedure will increase the 
effectiveness of existing arbitration facilities made available by the American 
Arbitration Association, The American, Boston, Cincinnati, Midwest, New York, 
Pacific and Philadelphia Stock Exchanges, the Chicago Board Options Exchange, 
and the National Association of Securities Dealers." The comments received by 
the Commission were to be placed in file No. S7-639. 

On November 15, 1977, the Commission requested comments on a proposed 
dispute resolution mechanism prepared by the SEC's Office of Consumer Affairs. 
The Office of Consumer Affairs recommended a three part integrated nationwide 
system for complaint processing and resolution of investor disputes after conclud- 
ing that "existing mechanisms for resolving such controversies viz. litigation and 
industry sponsored arbitration could be more responsive to the needs for inves- 
tors. "628 The first stage of the mechanism recommended by the Office of 
Consumer Affairs consists of requiring brokerage firms to establish a system for 
the receipt, processing and disposition of investor complaints. The firms would be 
required to keep records of this system and periodically report on the system to 
the Commission and the SROs. The second stage would consist of the creation of 
a uniform mediation/arbitration program. This program would be administered by 
an independent organization which would attempt to mediate all disputes and 



624. 15 U.S.C. 78a. 

625. See, Wilco v. Swann , 346 U.S. 427 (1953). 

626. Securities Exchange Act Release No. 19813, May 26, 1983. 

627. Securities Exchange Release No. 12528. 

628. Securities Exchange Release No. 12974. 



284 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

provide arbitrators for disputes where mediation is unsuccessful. This stage would 
include a streamlined arbitration process for resolution of disputes of less than 
$5,000. The third stage concerns claims of less than $1,000. These claims would 
be decided by a network of small claims adjusters on the basis of written submis- 
sions. 

On April 26, 1977 in Securities Exchange Act Release No. 13470 the Commis- 
sion deferred direct action on the development of arbitration procedures in 
response to the securities industry's self-regulatory organizations' decision to 
establish a conference to consider the implementation of a nationwide investor 
dispute resolution system. The Commission states "Although the Commission does 
have extensive authority over the self-regulatory organizations, their rules and 
procedures, it is of the view that it would not be useful at this time to interpose 
itself in this area since the Industry has manifested Its intention to take affirma- 
tive action." The SRO's organized the Securities Industry Conference on Arbitra- 
tion (SICA) which drafted a Uniform Code of Arbitration which has been adopted 
by all ten of its self-regulatory members and approved by the Commission. 

The simplified procedures established by SICA may be applied in any dispute 
between an Investor and a broker-dealer in which the claim involves an amount of 
$2,500 or less. A person with a claim commences this process by filing a claim 
letter, a submission agreement (an agreement to submit to arbitration and to abide 
by its decision), and a $15 deposit with the Director of Arbitration of an SRO. 
The Director of Arbitration notifies the respondent of the claim and allows the 
party twenty days in which to file an answer and/or counterclaim. The Director 
also selects an arbitrator to hear the dispute from a roster maintained by the 
sponsoring SRO. The arbitrator may request that two additional arbitrators be 
empaneled to hear any dispute. The parties will be notified of the name(s) and 
affiliations of the arbitrator(s). Each party may request that an arbitrator be 
disqualified if the party has cause to believe the arbitrator cannot make a fair 
and impartial award. 

Once selected, the arbitrator will make a decision and grant an award on the 
basis of the written submissions of the parties unless the investor requests or 
consents to an oral hearing. The arbitrator may require the parties to submit 
additional documentary evidence. The arbitrator's decision need not detail the 
reasons for an award and this decision is final. 

This example illustrates the relationship between the SEC and the self-regu- 
latory organizations. The SEC proposed the establishment of uniform arbitration 
procedures for the administration of small claims, but deferred governmental 
action when the SROs undertook to institute a program themselves. 



Federal Trade Commission 

The Federal Trade Commission encourages the development of informal dis- 
pute settlement procedures to resolve disputes concerning written warranties as 
well as disputes concerning matters within the Commission's jurisdiction under 
Section 5 of the Federal Trade Commission Act. The use of informal dispute 
settlement procedures to resolve warranty disputes Is encouraged in the Mag- 
nuson-Moss Warranty Act629 xhe FTC also encourages the use of informal 
dispute settlement procedures through the use of consent orders under Section 5 



629. 15 U.S.C. 8§ 2301-2310. 



DISPUTE RESOLUTION PROCEDURES 285 

of the FTC Act. The most significant effort in this area involves the consent 
order approved in the case.^^O 

Informal Dispute Settlement Under the Magnuson-Moss Warranty Act . The 
Magnuson-Moss Warranty authorizes the establishment of informal dispute settle- 
ment procedures by one or more warrantors to resolve disputes concerning written 
warranties. The Act states, "Congress hereby declares it to be its policy to 
encourage warrantors to establish procedures whereby consumer disputes are fairly 
and expeditiously settled through informal dispute settlement mechanisms. "^31 j^^q 
Act directs the Federal Trade Commission to issue rules prescribing the minimum 
requirements for an informal dispute resolution mechanism. These rules appear at 
15 CFR Section 703. A warrantor who complies with the Act and the rule 
promulgated under it may make resort to the mechanism a condition precedent to 
a civil suit under the Act. The Commission is authorized to review these 
mechanisms. The Conference Report makes clear, however, that this authority is 
not intended to preclude the courts from "reviewing the fairness and compliance 
with FTC rules of such procedures, "^32 

The Federal Trade Commission issued its Informal Dispute Settlement 
Procedure Rule on December 31, 1975.^33 jhe Commission noted, "the intent of 
the Act is to provide for a fair and expeditious settlement of consumer warranty 
disputes, through informal mechanisms established voluntarily by warrantors. "^34 
The rule seeks to "avoid creating artificial or unnecessary procedural burdens so 
long as the basic goals of speed, fairness and independent participation are 
met. "635 

Under the rule, a warrantor must inform a consumer of the existence of the 
mechanism on the face of the warranty. This notice must include the name and 
address or toll-free telephone number of the mechanism. The notice must inform 
the consumer that the mechanism is a prerequisite to a suit under the Magnu- 
son-Moss Act but is not a prerequisite to any other legal remedy. 

The warrantor must provide a consumer with either a form to file with the 
mechanism or a toll-free telephone number to call in the event a dispute 
arises. 636 jhe warrantor must also provide the consumer with a description of 
the mechanism procedures. 637 ^ warrantor is free to maintain its own wholly 
internal complaint resolution procedures in addition to establishing a mechanism 
under Magnuson-Moss so long as consumers are not required to seek redress from 



630. In the Matter of General Motors Corporation , Docket No. 9145 (1983). 

631. 15 U.S.C. § 2310(a)(1). 

632. Consumer Products Warranty and FTC Improvements Act; Conference 
Report to accompany S.356, December 18, 1974, p. 26. 

633. 40 Fed. Reg. 60190 (1975). 

634. 40 Fed. Reg. 60193. 

635. 40 Fed. Reg. 60193. 

636. 16 CFR 703.2(c)(1). 

637. 16 CFR 703.2(c)(3). 



286 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

this Internal process. 

The cost of the mechanism is to be borne by the warrantor. The Commis- 
sion's rule prohibits warrantors from charging consumers a fee for use of the 
mechanism. 638 This prohibition satisfies the concerns raised in the House 

Committee Report which states, "Informal dispute settlement procedures must also 
prohibit saddling the consumer with any costs which would discourage use of the 
procedures. "639 jf^^ Commission's prohibition on charging a fee for use of the 
mechanism has been criticized as encouraging frivolous complaints. 640 j^q 
Commission adopted this position, however, because, 1) the warrantor may compel 
a consumer to use the mechanism prior to suing under the Act, and 2) the 
decision of the mechanism Is non-binding. 641 

A mechanism established under the Act must function Independent of the 
warrantor's control. 642 ^he rule requires that a mechanism be "sufficiently 

insulated" from a warrantor's control or influence but does not prescribe the 
structure of the mechanism. The majority of the decisionmakers in a given 
dispute must be persons "having no direct involvement in the manufacture, 
distribution, sale or service of any product. "643 q^e rule also includes the general 
obligation that "members [of the mechanism] shall be persons interested in the 
fair and expeditious settlement of consumer disputes. "644 

The minimum operating procedures for a dispute settlement mechanism are 
set forth In 16 CFR 703.5. The mechanism must first notify both parties upon its 
receipt of a complaint. The mechanism is further directed to "investigate, gather, 
and organize all information necessary for a fair and expeditious decision. "645 j^ 
the event that information obtained from the parties Is contradictory, the 
mechanism must offer each party the opportunity to submit a written rebuttal or 
explanation. The mechanism may allow oral presentations only in disputes where 
both the warrantor and the consumer consent. The rule does not require the 
mechanism to offer this option nor does it prescribe the form of oral presentation 
which may be offered. 

The mechanism must issue a decision within 40 days of receiving a com- 
plaint. This time limit may be extended if the delay is attributable to the 
consumer. The mechanism decision is non-binding. Upon making its decision, the 
mechanism must determine the extent to which the warrantor will abide by its 



638. 16 CFR 703.3(a). 



639. House, Committee on Interstate and Foreign Commerce, Con- 
sumer Product Warranties and FTC Improvements Act, Report to accompany 
HR 7917, June 13, 1974, p. 40. 

640. 40 Fed. Reg. 60204. 

641. Id^ 

642. 16 CFR 703.3(b). 

643. 16 CFR 703.4(b). 

644. 16 CFR 703.4(c). 

645. 16 CFR 703.5(c). 



DISPUTE RESOLUTION PROCEDURES 287 

terms and inform the consumer of this fact. The mechanism must also monitor 
the performance of the parties and keep statistics of the number of disputes 
resolved and the degree of warrantor compliance. 

The informal dispute settlement mechanism authorized by Magnuson- Moss is a 
voluntary procedure. A warrantor who establishes a mechanism may, however, 
make resort to it a prerequisite to a lawsuit under Magnuson- Moss. Although the 
mechanism decision is non-binding, it is admissible in court. 646 

Informal Dispute Settlement Under Section 5 of the FTC Act . The FTC has 
begun to encourage the establishment of informal dispute settlement procedures 
under its authority granted in Section 5 of the Federal Trade Commission Act to 
prevent businesses from pursuing unfair or deceptive trade practices. A principal 
example of this effort is a recent agreement reached between the FTC and 
General Motors (GM). In 1983 the Commission approved a proposed consent 
agreement with General Motors Corp. (GM) settling In the Matter of General 
Motors Corporation . 647 jhe complaint filed by the FTC in August, 1980 alleged 
that GM violated Section 5 of the FTC Act by failing to notify customers of 
serious problems or defects in its products. The complaint defines serious 
problems or defects as "the occurrence or likely occurrence of an abnormal 
number of failures or malfunctions of a component, or group of components or 
systems where such failures or malfunctions are costly to correct or may sub- 
stantially affect the quality, reliability, durability or performance of a motor 
vehicle. "648 The complaint lists three components as illustrative of the existence 
of defects in GM motor vehicles. Specifically, the complaint alleged defects 
existed in 1) the THM 200 transmission, used in five to six million automobiles 
since 1976, 2) the camshaft used in fifteen million 305 and 350 cubic inch V-8 en- 
gines since 1974, and 3) the fuel injection pumps and fuel injectors used in half a 
million diesel engines since 1977. The complaint alleges GM knew or should have 
known of the existence of problems or defects in its products and failed to notify 
consumers of these facts. The failure to disclose the existence of serious 
problems or defects is alleged to constitute an unfair or deceptive act or practice 
in or affecting commerce in violation of Section 5 of the FTC Act. 

Under Section 5 of the Act after the Commission issues a complaint a 
hearing is held to allow the party to show why the Commission should not issue 
an order compelling the party to cease and desist from the violation charged. 
The Commission's decision is reviewable by the U.S. Court of Appeals; findings of 
fact, however, if supported by evidence are conclusive. After the practice has 
been determined to be unfair or deceptive and a cease and desist order has 
become final, the Commission may seek consumer redress under Section 19 of the 
Act. Under this Section the Commission may commence a civil action against a 
party subject to a cease and desist order and obtain consumer relief if a court is 
persuaded that the act or practice involved is one which a reasonable man would 
have known under the circumstances was dishonest or fraudulent. In such a 
situation a court may grant relief as it finds necessary to redress injury to 
consumers resulting from the deceptive act or practice. Section 19(b) states, 
"such relief may include, but shall not be limited to, rescission or reformation of 
contracts, the refund of money or return of property, the payment of damages. 



646. 15 U.S.C § 2310(a)(3), 16 CFR 7035(j). 

647. Docket No. 9145. 

648. Complaint, p. 1. 



288 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

and public notification" of the deceptive act or practice. In the case of the Gen- 
eral Motors agreement, the Commission chose to forego this litigation option In 
favor of the settlement agreement. 

Under the consent order signed by the Commission, CM agreed to establish a 
nationwide arbitration program to settle customer complaints concerning CM 
powertraln components, including transmissions, camshafts and fuel injection 
systems. This arbitration program expands upon an existing arbitration program, 
the Council of Better Business Bureau's National Mediation/ Arbitration program in 
which CM has participated since 1981. The program established under the consent 
order modifies BBB's existing arbitration program in several fundamental respects. 
Under BBB's existing program, upon receiving a consumer complaint the BBB staff 
contacts the business involved in the dispute and attempts to resolve the dispute 
through mediation between the consumer and the business. If mediation fails, the 
parties may agree to enter into binding arbitration. The consumer pays no fee 
for participation in the program. The mediation/arbitration steps remain the same 
under the FTC consent order except that under the consent order the arbitration 
result Is binding only upon GM; the consumer remains free to reject this result 
and seek compensation In court. 

Arbitrators are drawn from the rolls of BBB's trained volunteer arbitrators. 
The consumer and GM each receive a list of 5 potential arbitrators whom they 
must rank in order of preference. BBB then appoints the Individual with the 
highest mutual rating as arbitrator. Under the consent agreement GM must 
strike from consideration any arbitrator who has heard three or more disputes 
involving the components specified in the order. This situation should not arise 
however as it Is BBB's practice to limit Its arbitrators to no more than two cases 
for the same division of GM. This serves to avoid unfair selection advantage. ^49 
Technical experts may be provided by the BBB to assist the arbitrator in 
making a decision. The parties, however, remain free to bring their own techni- 
cal experts to testify at the arbitration. 

The arbitrator is to render a decision within 10 days. The BBB states that 
"decisions by the arbitrators, who represent a cross section of their communities, 
will be based on standards of consumer expectation rather than legal or en- 
gineering standards. "650 jYie decisions are intended to reflect the consumers 
conception of fairness. 

GM agreed to submit all complaints concerning powertraln components to 
this arbitration process. Arbitration will be offered initially in 39 cities, however 
BBB is prepared to administer GM cases in all of its 156 Bureaus. 651 This 
program is open to all individuals with complaints concerning GM powertraln com- 
ponents, regardless of whether the consumer still owns the automobile. 

GM agreed to notify by direct mail all those who have complained either to 
the FTC, a state agency or GM about a specified component of the existence of 



649. Comments of Council of Better Business Bureaus, FTC Docket No. 9145, p. 2036. 

650. Comments of Council of Better Business Bureaus, FTC Docket No. 9145, p. 
2026. 

651. Letter Trom Dean W. Determan, BBB Mediation/ Arbitration Division to Carol 
Crawford, FTC Bureau of Consumer Protection, June 17, 1983, FTC Docket 
No. 91455, p. 1740-1. 



DISPUTE RESOLUTION PROCEDURES 289 

the arbitration program. GM also agreed to publicize the arbitration program in 
full page advertisements in national magazines to appear initially twice and later 
three times each year. GM will also maintain a toll-free telephone number to 
provide information concerning this program. The consent agreement binds GM 
for a period of eight years. 

In addition to agreeing to submit all powertrain component disputes to the 
BBB's arbitration process GM also agreed to make its product service publications 
(PSPs) available to consumers for the next eight years. PSP's are notices and 
articles distributed to GM dealers and employees which describe repair and main- 
tenance procedures for GM vehicles. These documents may help consumers 
identify the source of problems they have experienced with GM cars. GM also 
agreed to prepare an index of these previously internal documents and to make 
the index and the documents themselves available to the public. These indexes 
will begin with the model year 1982. Under the consent agreement GM also 
agreed to publicize the availability of the PSP's in the same manner as it will 
publicize the existence of the arbitration process. GM is permitted to charge 
consumers for each PSP ordered in accord with a price scale established in the 
consent order. Consumers may also obtain subscriptions of all PSPs for a given 
model year, beginning in 1984, at a cost not to exceed a reasonable cost or the 
cost charged to GM dealers. 

The Federal Trade Commission and GM also developed "Background State- 
ments" or fact sheets which consumers may submit to an arbitrator. A separate 
background statement was prepared to address the THM 200 transmissions, 
camshafts and lifters, and diesel fuel injection systems. The purpose of these 
statements is to provide arbitrators with a general background of the dispute 
involving these specific powertrain components. 

This consent agreement has been described as the best alternative available 
by which the Commission may obtain redress for consumers who purchased GM 
cars with powertrain defects. The Commission's rejection of GM's offer to 
establish this arbitration program would have left GM car owners awaiting 
resolution of the FTC's complaint against GM through litigation — a process 
estimated to take up to ten additional years. As FTC Commissioner Patricia P. 
Bailey comments, "the settlement offers the commission the fastest and indeed the 
only feasible way to redress the injuries suffered by many GM owners. Our sole 
alternative is continued litigation which would take until at least the end of the 
decade to resolve. "652 Commissioner George W. Douglas agrees with Commis- 
sioner Bailey noting "while the settlement is not perfect — as is true of any 
negotiated agreement — it nevertheless provides an immediacy of relief and a far 
higher degree of certainty for a much wider range of injured consumers than the 
Commission could expect to secure through litigation. "653 The GM consent 

agreement was criticized by FTC Commissioner Michael Pertschuk. He argued 
that despite the attractiveness of several of the features of this program, arbi- 
tration which resolves consumer disputes on an individual case-by-case basis is 
inappropriate in a situation where "there is proof of systematic defects common to 
an entire class of similarly situated consumers. "654 Commissioner Pertschuk 
contends "the only rational and equitable remedy for the common injury suffered 



652. Statement issued April 26, 1983. 

653. Statement issued November 16, 1983, FTC Docket No. 9145, p. 2722. 

654. Statement issued, April 26, 1983. 



290 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

in a case like this is automatic compensation for damages, not standardless 
mini-trials pitting individual consumers against the largest company in the 
world. "655 He would have preferred the Commission settle the case by obtain- 

ing direct automatic refunds for consumers as had been obtained in several cases 
in the past. Commissioner Pertschuk notes however that CM refused to agree to 
any direct redress program in settlement negotiations. 

The majority of FTC Commissioners believes GM's establishment of a private 
dispute resolution mechanism designed to speedily resolve disputes, coupled with 
the increased disclosure of information contained in GM's PSPs and the availabil- 
ity of FTC/GM background statements afforded the Commission the best oppor- 
tunity for providing GM car owners with a viable remedy for injuries suffered as 
a result of purchasing defective GM cars. The Commission preferred this consent 
agreement to the alternative of pursuing resolution of the dispute through 
protracted litigation. 

During the 60 day public comment period which followed the Federal Reg- 
ister's publication of the consent agreement the Commission received comments 
from consumers, consumer advocates, GM, the Council of Better Business Bureaus, 
state attorneys general and other interested parties. GM defends the consent 
order as a reasonable negotiated compromise to a suit the FTC had little chance 
of winning. Initially GM notes the long delays and difficult course the Commis- 
sion would have to pursue in order to obtain consumer redress through litigation. 
The Commission would have to win in an administrative proceeding under Section 
5 of the FTC Act, succeed through appeal, then file suit in a U.S. District Court 
under Section 19 for consumer redress and succeed through that appeal. GM 
contends that the FTC's Section 5 case is grounded in a novel ill-defined legal 
theory. The FTC alleged GM committed an unfair or deceptive trade practice in 
violation of Section 5 by failing to disclose to consumers the existence of 
abnormally high rates of failure in certain of its products. GM comments 
"exhaustive legal research of this theory corroborates that neither the Commission 
nor any court has ever announced a duty to disclose abnormal failure rates. "^56 
GM contends that even if this theory were accepted by the Commission and the 
courts it has a strong factual defense with which to prove that its products 
performed satisfactorily. 

GM argues that an FTC effort under Section 19 of the Act, which is neces- 
sary to obtain consumer redress, has less chance for success than a case under 
Section 5. GM points out that in order to succeed under Section 19 the Commis- 
sion must prove to a court that GM's failure to disclose failure rates constitutes 
conduct which "a reasonable man would have known under the circumstances was 
dishonest or fraudulent." GM concludes that such a judgment would be difficult 
to obtain where the Commission relies upon a legal theory being applied for the 
first time which consists of vague terms such as the failure to disclose the exis- 
tence of abnormal failure rates. Finally, GM explains its motivation for settling 
the case as resulting from a desire to resolve a lawsuit which has generated a 
great deal of adverse publicity. 

The attorneys general of 29 states filed a joint comment concerning the 
FTC/GM consent agreement. The attorneys general focused on several aspects of 
this agreement rather than upon the relative merits of settlement versus litiga- 



655. Statement issued November 16, 1983, FTC Docket No. 9145, p. 2716. 

656. FTC Docket No. 9145, p. 2198. 



DISPUTE RESOLUTION PROCEDURES 291 

tion. Their comments criticize the notification procedures provided in the 
agreement, the mediation stage required in the BBB program, and the use of 
arbitration to resolve these disputes. 

The agreement requires GM to notify individuals who have registered com- 
plaints with either the FTC, a state agency or GM of the existence of the arb- 
itration program. The attorneys general contend that notice should be sent to all 
owners of record. They criticize the order's national advertisement requirement 
as lacking specificity. GM may comply with this requirement by explaining and 
promoting the arbitration process without mentioning the allegations of the FTC 
complaint or the specific products named in the complaint. 

The attorneys general also criticize the BBB requirement for mediation prior 
to arbitration. They view this step as excessive. The comment states "most 
owners who have complained about defects have already failed to resolve their 
disputes by dealing with GM's zone managers. To require them to repeat this 
once-failed process may strike some consumers as a frustrating waste of time. 
Consequently, they may well decide pursuing remedies is not worth the 
trouble. "657 i^e attorneys general also criticize the current rate at which BBB 
resolves disputes through mediation (ninety percent). They felt that such a high 
percentage of dispute resolution through mediation, in the absence of set param- 
eters for relief, indicates that personal factors such as a consumer's sophistication 
or perseverance rather than the merits of a case determine whether a consumer 
receives redress. 

Finally the attorneys general criticize the use of arbitration to resolve a 
large number of suits alleging common or systemic defects. They argue that the 
background or fact statements prepared by GM with the FTC fail to provide 
enough information to insure any uniformity in the resolution of disputes. 

The Council of Better Business Bureaus' comments to the consent order 
report the results of a study concerning 180 completed arbitration cases concern- 
ing GM components specified in the order. One-half of these cases concerned the 
THM 200 transmission, one-half concerned camshafts and one case involved a 
diesel fuel injection failure. These arbitrations account for approximately 11% of 
all complaints filed with BBB concerning these components. The remaining 89% of 
these complaints were resolved through mediation. The BBB has no data on the 
result of the mediations. Data on mediations will be kept under the terms of the 
consent order. In arbitrated cases consumers received awards in 54% of the 
cases. BBB reports that 43% of these awards were for the full amount of the 
repair bill. The average award to the consumer in a transmission case was $348 
and in a camshaft case $363. Reasons cited by arbitrators for not finding in 
favor of the consumer include the car being too far out of warranty (39 cases), 
poor maintenance (31 cases), and the lack of proof of repairs or maintenance (24 
cases). 658 

The Center for Auto Safety also filed comments with the FTC concerning 
the consent order. The Center criticized the use of arbitration to resolve these 
disputes, the background statements prepared by GM and the FTC, BBB's capacity 
to handle the number of complaints which may be filed, and the dates from which 



657. FTC Docket No. 9145, p. 1893. 



658. All statistics taken from comments submitted by Council of Better Business 
Bureaus, FTC Docket No. 9145, p. 2039-40. 



292 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

GM's product service publications will be made available. The Center also noted a 
further drawback to the agreement. According to the Center for Auto Safety, 
GM has entered Into negotiations with several GM consumer groups, particularly 
owners of GM diesel motor vehicles. The Center reports for example that a 
consumer group, Dieselgate, negotiated a claims procedure with GM which has 
handled over 2,000 claims and resulted in payments to consumers averaging more 
than $1,000. The Center reports at least two other groups. Lemon on Wheels 
(NY), and DOGMAD (CA), have also processed hundreds of claims each. The 
Center predicts that the consent order will crowd out these successful private 
efforts as GM will direct all claims to the BBB program. 

Despite the variety of criticisms levelled at the consent agreement the 
Commission approved it on November 16, 1983. The Commission's responses to 
those who filed public comments stress the substantial and immediate benefits the 
agreement provides. It cautions critics to weigh the imperfections of the redress 
mechanism established by the consent order against the prospect of litigating the 
case an additional seven to ten years. 



BACKGROUND REPORT FOR RECOMMENDATION 86-4 



THE SPLIT-ENFORCEMENT MODEL: 
SOME CONCLUSIONS FROM THE OSHA AND MSHA EXPERIENCES 



George Robert Johnson, Jr. 

George Mason University 

School of Law 

Arlington, Virginia 



Report to the Administrative Conference of the United States 
August 30, 1986 



294 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

I. INTRODUCTION 



When the Occupational Safety and Health Acti (OSHAct) 
was enacted, it adopted a relatively novel and seldom-used 
feature in federal administrative practice-- the split- 
enforcement model for agency adjudications. In this model, a 
major area of regulatory activity is divided between two 
wholly separate, independent agencies. This model contrasts 
with the more frequently encountered arrangement in which all 
administrative or regulatory functions-- rulemaking, 
enforcement, and adj udicat ion--are housed within a single 
agency. In the case of the OSHAct, one agency in the 
Department of Labor, the Occupational Safety and Health 
Administration (OSHA), has the responsibility for setting and 
enforcing health and safety standards. Challenges to those 
standards are adjudicated by the independent, three-member 
Occupational Safety and Health Review Commission (0SHRC).2 

A similar division of responsibilities exists in the 
area of mine safety and health. The Federal Mine Safety and 
Health Amendments Act of 19773 (MSHAct) assigns to the Mine 
Safety and Health Administration (MSHA), also within the 
Department of Labor, the task of developing and promulgating 
mandatory safety and health standards for the nation's mining 
industry. Challenges to those standards are adjudicated by 



129 U.S.C. §§651-678 (1982). 

2The Occupational Safety and Health Review Commission 
would refer to this administrative model as the "split- 
function" model. They point out that enforcement is not 
split between the Department of Labor and the Review 
Commission. Indeed they are correct: all the elements of 
enforcement-- investigation, citation, and prosecution-- are 
vested in the Department of Labor; only adjudicatory 
authority is lodged in the review commission. Nonetheless, 
for the purposes of this discussion, we shall often refer to 
the arrangement as the "split-enforcement" model. That 
formulation, however, is intended to suggest nothing 
different from what the review commission would mean by 
"split-function model." 

330 U.S.C. §§801-962 (1982). 



SPLIT ENFORCEMENT MODEL 295 

the independent Federal Mine Safety and Health Review 
Commission (MSHRC), composed of five members. 4 

Why, in these areas, has there been such a departure from the 
traditional, cohesive administrative schemes that prevail in 
other regulatory areas? Why has there been the perceived 
need so completely to separate the rulemaking and 
adjudicatory functions from each other? How has this 
arrangement worked? Are there modifications that might be 
made to improve the regulatory processes in these areas? 
Should this bifurcated model be followed in other 
administrative areas? In the area of occupational safety 

and health, the success of the split-enforcement model has 
been mixed, at best. Better results seem to have been 
achieved in the mine-safety area. How can these differences 
be explained?5 

The purpose of this report then is two-fold: first, to 
examine just how the split-enforcement model has worked-- 
particularly in the areas of occupational safety and health 
and mine safety and health; and second, to suggest how the 
scheme may be improved in these areas and in others where its 
use may be contemplated. 

Section II of the report reviews the statutes and the 
legislative histories of these two programs. Section III 
examines some of the problems and early conflicts in the OSHA 
program, with particular emphasis on the "deference" 
conflicts between the Department of Labor, in which OSHA is 
housed, and the independent Occupational Safety and Health 



4previously this "split-enforcement" arrangement has 
been used in federal income tax dispute cases. The Board of 
Tax Appeals, the predecessor to the United States Tax Court, 
was empowered to hear disputes from the Internal Revenue 
Service. See 26 U.S.C. §7441. 

The current system for enforcing certain provisions of 
the Federal Aviation Act divides responsibilities between the 
Federal Aviation Administration and the National 
Transportation Safety Board. See 49, App. U.S.C. §1 903(a) (9). 



5Some recent Congressional proposals to create a 
separate and independent Social Security Review Commission to 
adjudicate appeals from the denial of social security or 
disability benefits have been advanced. During the 98th 
Congress, two bills to create an independent Social Security 
Review Commission, H.R. 3541 and S. 1911, were introduced. 
Neither bill was enacted. Earlier proposals to adopt a 

split-enforcement arrangement were also considered in 
connection with the Fair Housing Amendments Act of 1979. 
Congress, however, eventually settled for the traditional 
unitary model in that legislation. 



296 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

Review Commission. Section IV looks at the same questions in 
the context of MSHA-MSHRC. Section V evaluates one of the 
frequent justifications cited for adopting this model-- the 
enhanced prospects for due process. Section VI attempts to 
draw some conclusions and proposes some recommendations 
regarding future uses of the split-enforcement concept. 

II. THE LEGISLATIVE HISTORY 

A. Occupational Safety and Health 

The OSHAct requires every covered employer to "furnish 
to each of his employees employment and a place of employment 
which are free from recognized hazards that are causing or 
are likely to cause death or serious physical harm to his 
employees. "6 Congress gave the Secretary of Labor broad 
authority both to adopt any existing safety standard and, by 
rule, to "promulgate, modify, or revoke any occupational 
safety or health standard. ... "7 



629 U.S.C. §654(a)(1) (1982). 



7 See generally , 29 U.S.C. §§654- 661 (1982). The OSHAct 
also authorizes the Secretary to conduct inspections and 
investigations of employment sites. If the Secretary 
concludes "that an employer has violated a requirement. . . 
standard, rule. . . order. . . or regulation (of OSHAct)," he 
issues a citation to the employer, who, within fifteen 
working days, must notify the Secretary whether the employer 
intends to contest the citation. If the employer fails to 
contest the citation within the fifteen-day period, the 
citation and any penalty assessed under it become final, and 
neither is subject to review by any court or by any other 
agency. If, on the other hand, the employer notifies the 
Secretary that the employer intends to contest the citation, 
"the Secretary shall immediately advise the Commission 
(OSHRC) of such notification, and the Commission shall afford 
an opportunity for a hearing . . . (and) thereafter issue an 
order, based on findings of fact, affirming, modifying, or 
vacating the Secretary's citation or proposed penalty, or 
directing other appropriate relief, and such order shall 
become final thirty days after its issuance." 

The hearing, initially before an administrative law 
judge (ALJ), is conducted in accordance with section 554 of 
the Administrative Procedure Act, but without regard to 
section 554(a)(3). The report of the administrative law 
judge becomes the final report of the Commission within 
thirty days after the judge's report, unless within that 
period a Commission member has directed that the AL J ' s report 
be reviewed by the Commission. 



SPLIT ENFORCEMENT MODEL 297 

The adoption of the occupational health and safety 
statute stirred intense controversy and disagreement from the 
very beginning. Even though there was considerable unanimity 
of opinion that American workers needed federal legislative 
protection in their workplaces, there was little agreement 
about how those federal standards would be promulgated and 
enforced. A principal focus of the legislative debate 
concerned the arrangement of the rulemaking, enforcement, and 
adjudicatory functions of the agency that would be 
responsible for this new program. Who would make the rules, 
and how extensive would be his authority to interpret those 
rules and to penalize violators of them? 

One of the original bills8 introduced in Congress would 
have followed the traditional administrative model and 
reposed all three functions-- rulemaking, enforcement, and 
adjudication-- in the Department of Labor. That bill enjoyed 
enthusiastic support from Democrats and from organized labor, 
which apparently felt that it could expect more vigorous and 
stringent protection from its traditional government ally. 
Another bill, 9 more strongly endorsed by business interests, 
would have divided the three administrative functions among 
three separate agencies-- one to promulgate the regulations, 
a second agency within the Department of Labor to enforce 
them, and a third independent agency to adjudicate 
challenges to them. As it finally emerged from Congress, the 
OSHActI embodies a compromise, engineered in the main by 
then-Senator Jacob Javits of New York. Both the Javits 
compromise and the more far-reaching bill that called for the 



Judicial review may be obtained in any United States 
court of appeals for the circuit in which the violation is 
said to have occurred or in which the employer has its 
principal office. Either the Secretary of Labor or any 
person who claims to be adversely affected or aggrieved by 
the Commission's order may petition for a review of the 
Commission's decision. Section 660 (a) also provides the 
District of 'Columbia Circuit as an additional forum, 
available to "any person adversely affected or aggrieved by 
an order of the Commission issued under subsection (c) of 
section 659. ..." 

8h.R. 843, 90th Cong., 2d Sess. (1967). 

9h.R. 13373, 91st Cong., 1st Sess. (1969); S. 2788, 91st 
Cong., 1st Sess. (1969). 

lOoSHAct, Pub. L. No. 91-596, 84 Stat. 1590 (1970). 



298 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

complete three-way division of responsibilities were 
concerned that so concentrated a grant of power to the 
Secretary and the Department of Labor, as envisioned by the 
Democrats' original bill, would create an appearance of 
unfairness and, therefore, compromise the prospects for due 
process in adjudicatory challenges to the Department's 
standards. In a statement of his individual views 
accompanying an early version of the act,''1 Senator Javits 
remarked that: 

...[Hjearing and determination of enforcement cases by 
an independent panel more closely accords with 
traditional notions of due process than would hearing 
and determination by the Secretary. In the latter case 
the Secretary is essentially acting as prosecutor and 
judge. Any finding by the Secretary in favor of a 
respondent would essentially be a repudiation of his own 
Department's employees. While this type of enforcement 
has been used in connection with other statutes, is 
contemplated by the Administrative Procedures (sic) Act, 
and is not j urisdict ionally defective on due process 
grounds, the awkward mechanics it imposes on heads of 
Departments who wish to exercise their adjudicatory 
power personally in order to preserve due process has 
not been appreciated. What happens is that one official 
of the Department (e.g., the Deputy Solicitor) will take 
the position of prosecutor and another official (e.g., 
the Solicitor) will take the position of a neutral in 
order to advise the Secretary. 

More important, because of the awkwardness of this 
procedure and the heavy burden of personally reviewing 
hundreds of enforcement cases, it is highly likely that 
the Secretary of Labor will not even exercise his power 
under the Committee bill personally, but will delegate 
it to a panel of officials within the Department.... 
The net result will be enforcement by a panel anyway, 
but not one which is independent .... 1 2 



lis. Rep. No. 1282, 91st Cong., 2d Sess., reprinted in 

1970 U.S. CODE CONG. & AD. NEWS 5177, 5218. See also , 

LEGISLATIVE HISTORY OF THE OCCUPATIONAL SAFETY 7 HEALTH ACT 
OF 1 970, 1 95 (1 970). 

1 2id,. The Javits amendment also reflected a concern 
for speed of enforcement. The amendment allowed for 
immediate, self -enforcing orders at the conclusion of the 
administrative proceeding. The original Senate bill provided 
that no enforceable order to correct a violation would issue 
until both the administrative proceeding and any availed-of 
judicial proceedings had ended. Javits believed that his 



SPLIT ENFORCEMENT MODEL 299 



Even though Javits recognized that the unitary model 
existed in other statutes and was "not j urisdictionally 
defective on due process grounds," he pressed for and 
prevailed in dividing the responsibilities between the 
Secretary of Labor and the independent review commission. It 
was Javits's view, and the view of several others in 
Congress, that "the independent Panel approach would... 
preserve due process more easily, and thereby instill much 
more confidence in the whole program in workers and 
businessmen alike. "13 



B. Mine Safety and Health 

The MSHAct repealed the Federal Metal and Nonmetallic 
Mine Acti 4 and substantially amended the Federal Coal Mine 
Health and Safety Act. 15 The result placed coverage of the 
entire mining industry, metal and non-metal, under one act; 
transferred enforcement responsibility from the Secretary of 
Interior to the Secretary of Labor; streamlined the 
procedures for promulgating and enforcing health and safety 
standards; and created an independent review commission to 
resolve contested citations. 16 



compromise would save between six months and two years in 
most contested cases. 



1 3See, LEGISLATIVE HISTORY OF THE OCCUPATIONAL SAFETY & 
HEALTH ACT, supra note 37. 

1430 U.S.C. §721 (repealed 1977). 

1530 U.S.C. §§801-962 (1982). 

16 see generally , 30 U.S.C. §§813-823 (1982). The MSHAct 
empowers the Secretary to promulgate mandatory health and 
safety standards and includes detailed provisions for the 
inspections of mines. The MSHAct requires the Secretary to 
conduct frequent mine inspections to determine, among other 
things, whether the mine operators have complied with the 
mandatory health or safety standards and other provisions of 
the act. When an inspector concludes that a mine operator 



300 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

In many ways the mine-safety statute resembles the 
occupational safety and health statute. Both statutes divide 
rulemaking and adjudicatory authority between the Labor 
Department and an independent review commission. Yet there 
are important differences between the two statutes and the 
programs they create. 

The most obvious difference-- and perhaps the most 
crucial-- between the two statutes is in the breadth of their 
coverage. The OSHAct potentially covers every conceivable 
kind of industrial and occupational category, almost every 
conceivable employment situation, almost every employer-- 
from General Motors to the neighborhood greengrocer. The 
extent of the act's coverage is itself daunting to 
contemplate. By its terms, the OSHAct applies to "every 
person engaged in a business affecting commerce who has 
employees." Only the United States government, the states of 
the United States, and their political subdivisions are 
excluded from its coverage. 17 it would appear to be an 
almost impossible task for OSHA to know with any accuracy 
just how many "persons" are, at any particular time, subject 
to its jurisdiction. Furthermore, except for the statutory 



has violated the act or one of the standards issued pursuant 
to it, "he shall with reasonable promptness, issue a citation 
to the operator," which must specify "a reasonable time for 
the abatement of the violation." An operator's failure to 
abate the citation may result in an order, requiring all 
persons to be withdrawn from the area of the mine affected by 
the citation, until the Secretary of Labor determines that 
the violation has been abated. For each citation, the 
Secretary may propose a civil penalty, which may not exceed 
ten thousand dollars for each violation. 

The MSHAct also permits operators to contest citations 
and proposed penalties within thirty days of their issuance. 
If, within the thirty-day period, the operator does not 
notify the Secretary that the operator intends to contest the 
citation, both the citation and the proposed penalty become 
"a final order of the Commission. . . not subject to review 
by a court or agency." If the operator files a timely 
contest, the case is heard by an administrative law judge of 
the review commission. Any person adversely affected or 
aggrieved by a decision of an ALJ may file, within thirty 
days after the issuance of that a decision, a petition for 
discretionary review by the Commission. If not satisfied 
with the Commission's decision, such person, within thirty 
days of the issuance of the decision, may obtain judicial 
review in an appropriate court of appeals. 

1729 U.S.C. §652(a). 



SPLIT ENFORCEMENT MODEL 301 

charge requiring "every employer to furnish each of his 
employees employment and a place of employment which are free 
from recognized hazards, "18 there is little identity of 
interests or commonality to unite those subject to OSHA's 
regulatory jurisdiction. 

The MSHAct, on the other hand, applies to a discrete and 
insular employment sector, whose membership, although varied 
in size and geographic location, is more similar and 
homogeneous with respect to the industrial activities and the 
occupational hazards to which they are exposed. According to 
one MSHA official, at almost any given moment, it is possible 
for MSHA to determine with substantial accuracy the number of 
persons and mines subject to its j urisdiction. 1 9 MSHA 

regulates only one industry. OSHA, by comparison, regulates 
virtually everything else. 20 

In another contrast, the mine-safety legislative 
history, however, discloses no spirited debates or 
disagreements regarding use of this bifurcated administrative 
arrangement. On the contrary, the Committee report 
accompanying the bill that became law states rather 
matter-of-factly that: 

[t]he Committee realizes that alternatives to the 
establishment of a new independent reviewing body 
exist.... The Committ ;e also recognizes that there are 
organizational and administrative justifications for 
avoiding the establishment of new administrative 
agencies. However, the Committee believes that the 
considerations favoring a completely independent 
adjudicatory authority outweigh these arguments. 

The Committee believes that an independent 
Commission is essential to provide administrative 



18id. at §654(a). 

1 ^Interview with Frank O'Gorman, Federal Mine Safety and 
Health Administration, Arlington, Virginia (February 3, 1986). 

20There is at least one other difference. Unlike 
OSHRC, MSHRC is composed of five members who are empowered to 
act in panels. One commentator has called for enlarging 
OSHRC from its current three to five members. See Rothstein, 
infra note 



302 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

adjudication which preserves due process and instills 
much more confidence in the program. 21 



Again, preserving due process and eliciting more confidence 
in the program are asserted as reasons for this novel 
administrative arrangement. Is some fundamental change at 
work here? 

The idea of separation of functions is not a novel 
concept in administrative law. 22 it is almost axiomatic that 
some functions should be separate from others, that the 
prosecutor should be distinct from the investigator and from 
him who would decide disputed questions of fact. 23 That is 
basic to the American idea of due process. Yet, in 
administrative law, due process has never been held to 
require that those functions be as separate, as independent 
as they are in the OSHA-OSHRC and the FMSHA-FMSHRC schemes. 24 



21 Senate Committee on Human Resources, FEDERAL MINE 
SAFETY AND HEALTH ACT OF 1977, S. Rep. No. 181, 95th Cong., 
1st Sess. (1977), reprinted in 1977 U.S. CODE CONG. & AD. 
NEWS 3401 , 3446-7. 

22The Administrative Procedure Act provides for a system 
of internal separation of functions in agencies that exercise 
both rulemaking and adjudicatory authorities. The main 
provisions are in section 554(d) of the APA. The provision 
is applicable only to cases "of adjudication required by 
statute to be determined on the record after opportunity for 
an agency hearing" with certain exceptions laid down at 
section 554(a) and section 554(d). 

23According to Professor Kenneth Davis, "What the 
Administrative Procedure Act calls °separation of functions' 
is designed to prevent contamination of judging by the 
performance of inconsistent functions, including primarily 
prosecuting and investigating, and secondarily instituting 
proceedings, negotiating settlements, and testifying. Many 
agencies, either through agency heads or their staffs or 
both, perform all these various functions. The problem is to 
separate inconsistent functions in such a way as to protect 
the judging function." See generally , Kenneth Culp Davis, 
ADMINISTRATIVE LAW TEXT (3rd Edition), Chapter 13. 

24The case law generally rejects the notion that the 
combining of judging with prosecution or investigation is i£ 
so facto a denial of due process. See , e.g. MARCELLO v. 
BONDS, 349 U. S. 302 (1955). 



SPLIT ENFORCEMENT MODEL 303 

In fact, one of the advantages traditionally associated with 
the American administrative agency is its unique combination 
of rulemaking, enforcement, and adjudicatory functions. 25 
What, then, can explain these breaks with tradition?26 

During the OSHA legislative debates. Senator Javits 
conceded that the traditional administrative arrangement is 
"not defective on due process grounds." The legislative 
report on the MSHAct, on the other hand, asserts that such a 
complete separation "is essential to provide due process and 
[instill] much more confidence in the program." Little else, 
however, is said in either legislative discussion regarding 
what is in some ways a really radical decision-- the decision 
to separate the traditional administrative functions in so 
unconventional a fashion. 

And how would these divisions of responsibility really 
work? In the legislative history of the MSHAct, Congress 
does attempt to clarify its intentions with respect to how 
this division of administrative responsibilities between MSHA 
and MSHRC should function. At one point, the Committee 
report provides that, "[s]ince the Secretary of Labor is 
charged with responsibility for implementing this Act, it is 
the intention of the Committee, consistent with generally 
accepted precedent, that the Secretary's interpretations of 



25See, e.g., B. Schwartz, ADMINISTRATIVE LAW §1.5 (2nd 
Ed. 1984), citing , REPORT OF ATTORNEY GENERAL'S COMMITTEE ON 
ADMINISTRATIVE PROCEDURE (1941 ) . 



26no other administrative models of separation go as far 
as the examples provided by the OSHA-OSHRC and FMSHA-FMSHRC 
schemes. The National Labor Relations Board (NLRB), however, 
does provide an example of a different kind of separation. 

The Taft-Hartley Act of 1947 provides for a General 
Counsel of the NLRB, who is appointed directly by the 
President for a four-year term. The General Counsel is 
completely independent of the Board. His authorities include 
investigating and prosecuting labor violations. He has final 
authority to investigate charges, issue complaints, and 
prosecute those complaints before the Board, which under the 
statute is an adjudicatory agency only. The substance--if 
not the form-- of the NLRB, therefore, is of two separate 
agencies with the independent Office of General Counsel 
performing the investigating and prosecuting functions and 
the five-member Board limited to hearing and deciding cases. 
See, 29 U.S.C. §1 53. 



304 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

the law and regulations shall be given weight by both the 
Commission and the courts. "27 

Even such a meager statement of Congressional intention 
is absent from the OSHAct. Was this "directive" included in 
the mine-safety statute in view of the evidence that the 
OSHAct agencies and the courts reviewing their decisions were 
often confused regarding the extent of their respective 
responsibilities? Can the confusion between OSHA and OSHRC 
be attributed to the absence of clear congressional 
directives to the two agencies? If so, has this statement in 
the MSHAct obviated similar confusion between MSHA and MSHRC? 
And what of the congressional champions' principal reasons 
for advocating such a complete separation of functions: has 
this administrative arrangement resulted in more fairness and 
due process or instilled more confidence in either regulatory 
program? 

Is it the statutes themselves, the ways in which the 
agencies created under them are expected to operate, or is 
there something unique about these regulatory programs that 
may explain these departures? What conclusions may fairly be 
drawn from these experiences-- in the case of OSHA-OSHRC, now 
more than fifteen years; in the case of FMSHA-FMSHRC, almost 
ten? 



III. INSTITUTIONAL CONFLICTS: The OSHAct 

In principle the idea of separate, independent 
adjudication is appealing. It is so fundamental a feature of 
Anglo-American law. Who could quarrel with the concept? Yet 
the independent adjudication under the OSHAct has not met 
with universal acclaim. In fact, confusion regarding the 
precise nature of OSHRC' s role was a major source of the 
early and persistent criticism of the OSHA program. An 
earlier study chronicled many of the Commission's initial 
problems. Among the problems cited were the Commission's 
tremendous caseload and its delay in deciding contested 
cases-- due, in large measure, to one commissioner's "protest 
policy", which effectively directed every case for full 
Commission review; and the lack, of unanimity among the 
Commissioners, which delayed the decision process because of 
the frequency of separate opinions, 28 



27senate Committee on Human Resources, FEDERAL MINE 
SAFETY & HEALTH ACT OF 1977, S. Rep. No. 181, 95th Cong., 1st 
See. (1977), reprinted in 1977 U.S. CODE & AD. NEWS 3401. 

28 see Rothstein, OSHA After Ten Years: A Review and 
Some Proposed Reforms , 34 VANDERBILT L. REV. 71 (1981). See 
also Sullivan, Independent Adjudication and Occupational 



SPLIT ENFORCEMENT MODEL 305 

OSHA was born with a problem that really was not of its 
own making. Section 6(a) of the OSHAct directed the 
Secretary "as soon as practicable" to promulgate as a 
national health and safety standard "any national consensus 
standard, and any established federal standard. "29 These 
"received" standards were to be promulgated without the 
necessity of complying with the provisions of the APA.30 
OSHA, therefore, began its life with several regulations that 
it had no hand in devising. The administrative problems 
developed almost immediately. 31 

Some of OSHA's early problems may be attributed to its 
forced reception of these consensus standards, many of which 
had been privately adopted and which previously had 
functioned primarily as optional, aspirational, measures. 32 



Safety and Health Policy; A Test for Administrative Court 
Theory , 31 AD. L. REV. 177 (1979). 

2929 U.S.C. §655(a) (1982). 

30id. 

31 See, Rothstein, supra note . 



32professor Rothstein' s text on occupational safety 
highlighted some of the early problems encountered because of 
this wholesale adoption of industry standards without public 
comment. 

At one point he writes: 

The overwhelming majority of safety standards 
were adopted from already existing private 
standard's. These standards are hardly models of 
clarity and precision and have been subject to 
considerable criticism. 

Because of the poor quality of many standards 
the Commission and courts have been forced to 
choose between two competing interests. On the one 
hand, the immediate safety of employees suggests 
the need for the broadest possible construction and 
the widest application of standards to best 
effectuate the remedial purpose of the Act. On the 
other hand, due process considerations favor a 
strict construction of standards so that 
employers will not be penalized without having 
received adequate prior notice of the required 



306 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

Review of standards promulgated pursuant to section 6(a) 
would present special difficulties. What, in their origins, 
were mainly intended to be voluntary standards are by virtue 
of section 6(a) transformed into enforceable government 
requirements. What should be the government's attitude 
regarding these "standards"? Do they become enforceable as 
the original non-government promulgators might have intended? 
Or, might the government insist on a different level of 
compliance or compliance by companies which, although members 
of the target industry, may not have subscribed to the 
original, voluntary standards? And finally, is the 
government, by adopting these consensus standards, saddled 
with the entire "legislative history" from the industrial 
organizations that developed them? These are but some of the 
questions that appear neither to have been asked nor 
considered in the legislative discussions of the OSHAct. 

The review commission, or at least one member of the 
Commission, has taken the view that, because such standards 
themselves did not emanate from the Secretary, the Commission 
should be free to re-interpret such standards whenever it 
disagrees with the construction or effect that the Secretary 
might give to them. 33 As one might expect, that view has 
led to several disputes between the Labor Department and the 
review commission. Not only should the Commission be free to 
make its own determination regarding the meaning of a 
consensus standard, but, according to this view, it should 
also be free to interpret the meaning of any established 
federal standard promulgated under 6(b). 34 

OSHA officials, of course, are not impressed with that 
argument. Instead they argue that OSHA was given the 
rulemaking authority and that its judgment regarding the 
meaning of the rules-- be they 6(a) or 6(b) rules — should be 



conduct. 

See , M. Rothstein, OCCUPATIONAL SAFETY AND HEALTH LAW §125 
(2d Ed. 1983). 



33interview with E. Ross Buckley, Chairman, Occupational 
Safety and Health Review Commission, Washington, D.C. (August 
8, 1985). 



34standards other than the consensus and other received 
industry standards, promulgated on the Secretary's own 
initiative are often called "6-b" standards, referring to the 
section of the OSHAct that empowers the Secretary to issue 
new safety standards. See, 29 U.S.C. §655. 



SPLIT ENFORCEMENT MODEL 307 

conclusive. Furthermore, they maintain that since the vast 
majority of standards promulgated are still 6 (a) -standards, 
the Commission could, under the guise of adjudicating, 
effectively set occupational health policy, thereby 
eviscerating the authority Congress sought to repose in the 
Secretary. 35 

Whether they be 6(a) or 6(b) standards, a major source 
of contention has existed over how authority under the act is 
intended to be distributed between OSHA and OSHRC. An 
examination of some of the principal disputes between these 
agencies confirms the struggle that periodically has raged 
between OSHA and the Commission. Not only that, but this 
examination also reveals that the federal courts have not 
been much more successful than have the two agencies at 
determining just how this allocation of responsibilities 
should operate. 

A. A. AMORELLO AND SONS ; The Problem of Deference 
1 . Before the Commission 

One might well read the Commission's duty to "issue an 
order, based on findings of fact, "36 as narrowly 
circumscribing the Commission's role to ascertaining whether, 
in fact, the cited employer has done what the Secretary 
forbade (or has refused to do what the Secretary has 
decreed). That language does not imply — at least, it does 
not unavoidably imply — that the Commission would have any 
role whatsoever in evaluating the wisdom, utility, or the 
subjective necessity for the challenged standard. Rather, 
the language seems more plausibly to suggest that the 
Commission make the more objective, neutral determination 
that the cited employer either did or did not violate the 
Labor Department's standard. Yet, neither the Commission nor 
many reviewing courts have been willing consistently to 
ascribe to the Commission that singular responsibility. 

Donovan v. A. Amorello and Sons 37 is one of the more 
recent cases to have faced the conflict that has frequently 
flared between OSHA and OSHRC. 



35interview with Frank White, Associate Solicitor, and 
Daniel Mick, Counsel for Regional Trial Litigation, 
Occupational Safety and Health Administration, Washington, 
D.C. (August 28, 1985) . 

3629 U.S.C. §659(c) (1982). 

37761 F.2d 61 (1st Cir. 1985). 



308 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

OSHA had charged Amorello, a Worcester, Massachusetts, 
contractor, with violating an OSHA regulation which states: 



No employer shall permit earthmoving. . .equipment which 
has an obstructed view to the rear to be used in reverse 
gear unless the equipment has in operation a reverse 
signal alarm distinguishable from the surrounding noise 
level or an employee signals that it is safe to do so, 38 



In response to a complaint regarding an unshored trench, 
an OSHA compliance officer and his supervisor visited an 
Amorello worksite in Worcester, Massachusetts. There they 
observed a front-end loader operating in reverse. According 
to the Commission decision, "(n)either the compliance officer 
nor his supervisor heard a backup alarm. "39 Even though, 
later during the inspection, the compliance officer was shown 
that the loader was equipped with an alarm, his report 
concluded that Amorello was in violation of the standard 
because "a backup alarm was required to be in operation while 
the loader was in motion because the view to the rear was 
obstructed. "40 

The administrative law judge who heard Amorello's 
contest did not decide the issue of whether the company's 
loader had an obstructed view. Rather, he vacated that item, 
because the compliance officer subsequently admitted that he 
had heard an alarm during the inspection. The ALJ then 
determined that, because of this "credibility finding," the 
compliance officer's testimony "was otherwise entitled to no 
weight. "41 

At the Commission hearing, OSHA argued that the ALJ's 
reasons for refusing to credit the compliance officer's 
testimony were unsound. Furthermore, OSHA contended that a 
violation was proved "because the standard requires either a 
reverse alarm or a signalman if the view to the rear is 



3829 C.F.R. §1926.602(a)(9)(ii) (1984). 

3911 OSHRC 2040 (1984). 

40id. 



41 See, Brief for Petitioner (Secretary of Labor) at 5, 
DONOVAN V. AMORELLO AND SONS, INC., 761 F.2d 61 (1st Cir. 1985). 



SPLIT ENFORCEMENT MODEL 309 

obstructed to any extent. "42 OSHA maintained that the 
operator's view to the rear was obstructed by an exhaust pipe 
and by the position of the loader's engine. The ALJ decided 
that the Secretary's citation should be vacated. By a vote 
of 2-1, the Commission affirmed the ALJ's decision to vacate 
the citation. 43 

Even though the Commission affirmed the administrative 
law judge's decision to vacate the citation, it did so for 
reasons different from those of the ALJ. The Chairman of the 
Commission wrote that: 

[the] evidence establishes that the loader's operator 
had a clear view to the rear, unblocked by any part of 
the loader, except for two feet immediately behind it, 
where the view was limited only by the location of the 
loader's engine. The question therefore reduces to 
whether the two-foot limitation created by the engine 
compartment amounts to an "obstructed view to the rear" 
within the meaning of the standard , (emphasis added) I 
think not. 44 



According to the Chairman's opinion, this condition was not 
within the meaning of the standard because it "is not a 
significant obstruction created by a special part of the 
vehicle. . .that obstructs the operator's view during the 
entire course or a significant portion of the rearward 
travel. "45 in addition, the majority commissioners 
justified their decision on the basis that the operator's 
rear field of vision was limited "only during the first two 
feet of travel; after that, the operator's field of vision 
encompassed areas previously seen to be clear. "46 The 
Chairman's opinion concludes with the observation that "the 
phrase "obstructed to the rear' did not appear in the 
proposed version of this standard...." Because the 
originally proposed standard would have required backup 



42id. 

4311 OSHRC 2040 (1984) 

44id. 

45id. 
46id. 



310 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

alarms on all earthmoving equipment, the opinion found that 
the phrase "obstructed view to the rear" was not meant "to 
govern minor limitations that are common to nearly all 
earthmoving equipment . "4 7 The Commission thus concluded 
that, because there was no "significant" obstruction, there 
was no violation of the OSHA regulation. 

Commissioner Buckley, concurring in the Chairman's 
decision, wrote that the obstructed view existed for a 
distance of only two feet from the rear of the loader, that 
the inspectors did not see the machine operate during the 
first two feet of its rearward motion and, therefore, that 
they could not know the alarm was not working. 

Commissioner Cleary, dissenting, rejected the reading of 
his colleagues and maintained that the citation should be 
affirmed. In his view, the purpose of the standard is "to 
ensure that employees are not in the path of earthmoving 
equipment. "48 As he saw it, the majority's interpretations 
would defeat the purpose of the standard. Furthermore, 
Cleary acknowledged that his colleagues had "effectively 
rewritten [the standard] to limit its applicability to 
°signif icant ' obstructions. "49 The result, he said, would 
be to except obstructions that are common to nearly all 
earthmoving equipment from the coverage of the standard. 

Cleary could discern no reason to conclude that the 
addition of the phrase "obstructed to the rear" to the 
proposed standard would render the standard inapplicable to 
minor limitations. But perhaps most significantly, Cleary 
would have affirmed the Commission's decision, because, as he 
said: 

The majority interpretations also introduce a 
mischievous element of subjectivity into a standard that 
objectively sets forth the circumstances under which 
compliance is required. Heretofore, an employer could 
confine his inquiry to whether the view of the operator 
was obstructed within the plain meaning of the term. An 
employer now must also determine whether the obstruction 
is "significant." But there is little guidance as to 
when a "significant" obstruction exists..., I am 
unclear as to when an obstruction ceases to be a "minor 
limitation" and becomes "significant" and I suspect 
employers who apply this standard in the future will 
share my confusion. Under the rationale in the 



47id. 
48id. 
49id. 



SPLIT ENFORCEMENT MODEL 3 1 1 

concurring opinion, instead of determining whether 
the entire path to the rear of equipment is in the 
operator's view, an operator must take "several factors" 
into account to decide whether the view is obstructed. 
Little guidance is provided as to how to apply these 
factors or when these factors combine to yield a 
conclusion that an obstructed rear view exists. 50 



Only Cleary, among the commissioners who decided 
Amorello , seems to have appreciated the institutional roles 
that had been assigned the respective agencies. Cleary 's 
dissenting opinion recognizes, even if does not explicitly 
state so, that the Secretary may employ whatever subjective 
criteria he thinks appropriate when he promulgates a 
regulation. He, of course, may eschew subjective criteria 
altogether. That is the nature of legislative choices-- 
subjective, preferential in many instances. When 
promulgating rules pursuant to his statutory charge, the 
legislator may call on any and all of the knowledge or 
information available to him. 51 The adjudicator's role, 
however, must be different. The adjudicator must evaluate 
facts, evidence to ascertain whether the party charged with a 
violation has followed — or, as the case may be, refused to 
follow-- the legislator's decree. 52 in Amorello , the 



50id. 



51 See generally , B. Schwartz, ADMINISTRATIVE LAW (2d Ed. 
1984) § 4.8: Rulemaking is the administrative equivalent of 
the legislative process of passing a statute. Agencies 
engaged in rulemaking are, as a general proposition, no more 
subject to constitutional procedural requirements than is the 
legislature engaged in enacting a statute. . . . Nor is the 
rulemaking process bound by the principle of exclusiveness of 
the record. The agency may look beyond the record and rely 
on the kinds of investigative and other extrarecord materials 
used by legislative committees. It may act not only on the 
basis of the hearing record, but also upon the basis of 
information in its own files and its knowledge and 
expertise. " 

52Adj udicators , as distinguished from rulemakers, are 
generally limited to a "record" of some kind in making their 
decisions and judgments. The adjudicator must be guided by 
"all the relevant factors" and those alone; and in the 
context of formal proceedings, the relevant factors must 
appear within the four corners of the record. See, e.g. 



312 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

majority commissioners did not discharge their 
responsibilities under the act. Rather, they strayed into 
the field of subjectivity and sought to exercise a function 
that, by logic if not by law, belongs to the Secretary. 

2. In the Court of Appeals 

Having failed to persuade the Commission that the 
Amorello citation should be affirmed, the Secretary of Labor 
sought review in the Court of Appeals for the First Circuit. 
In an opinion by Judge Breyer, the court vacated the decision 
of the Commission. In vacating the Commission's order, the 
court held that OSHA's interpretation of its regulation 
should be controlling so long as it is reasonable. 53 That 
reasonableness, according to the court, should be evaluated 
in light of "the agency's likely greater knowledge of the 
rule's intended purpose and the agency's practical 
understanding of how competing interpretations may affect the 
agency's regulatory mission. "54 in siding with the 
Secretary, the Amorello court based its decision on two 
considerations-- the legislative history and practical 
administrative requirements. 

First, the court examined the legislative history of the 
OSHAct, concluding that it "suggests that OSHRC's mission is 
primarily factual in nature, its role is to hear charges of 
violations ...[ and ] to guarantee that those charged are 
adjudicated fairly. "55 The court reasoned that, even though 
Congress did establish OSHRC as an independent review 
commission, it intended that the Commission's powers would be 



CITIZENS TO PRESERVE OVERTON PARK v. VOLPE, 401 U.S. 402 
(1971). See also , 5 U.S.C. §§554, 556, & 557. 

53761 F.2d 61, 63 {1st Cir. 1985). See also , DONOVAN v. 
DANIEL MARR & SON, 763 F.2d 477, 483 (1st Cir. 1985) 
(following AMORELLO yet saying: "This does not mean that a 
persuasive interpretation by the Commission will give way to 
a marginal interpretation by the Secretary; but where, as 
here... the Commission's view seems, if not insupportable, at 
least strained, there can be little choice as to which 
reading we must accept."); ISAAC v. HARVARD UNIVERSITY, 
769 F.2d 817 (1st Cir. 1985), BROCK v. SCHWARZ- JORDAN, INC., 
777 F.2d 195 (1st Cir. 1985). PRACTICO v. PORTLAND TERMINAL 
CO., 783 F.2d 255, 269 (1st Cir. 1985) Campbell, dissenting. 

54761 F.2d at 63. 

55id. at 65. 



SPLIT ENFORCEMENT MODEL 3 1 3 

very limited. Because Congress did not elect to place 
rulemaking authority in an agency separate from OSHA suggests 
that "Congress did not intend OSHRC to possess broad powers 
to set policy through the creation of rules — powers that 
other agencies sometimes exercise in adjudicatory (as well as 
rulemaking proceedings ). "56 

Second, the Amorello court found that "practical 
administrative considerations favor looking to OSHA for a 
more authoritative interpretation of a regulation. "57 OSHA 
chose the language of the regulation; it is more likely to 
have "an institutional memory" of its meaning and purpose. 58 
Because OSHA is both the "legislating" and "enforcing" 
authority, that dual responsibility "provides it with expert 
knowledge of the practical outcomes of different 
interpretations. "59 The court does not gainsay that OSHRC 
too has acquired some expertise from adjudicating disputes 
over OSHA regulations and that expertise is entitled to some 
weight in appropriate circumstances. "But," the court says, 
"that experience arises out of its having adjudicated many 
cases; it is likely factual in nature; and it necessarily 
concerns examples of rule violations (which are presumably 
less typical than instances of compliance) . "60 

The Amorello court, it may be said, decided the question 
of whose interpretation should prevail by examining the 
intended functions of the two agencies. The court reviews 
the functions of the two agencies in the context of the 
entire administrative apparatus that Congress has here 
created. In addition, it also examines what Congress 
asserted to have been its primary aims when it departed from 
the traditional administrative arrangement when this statute 
was adopted. 

Even though Congress chose to divide the administrative 
responsibilities between two agencies, it nonetheless gave to 
OSHA the rulemaking and enforcement authority. While the 
concept of such divided responsibilities may have been novel, 
what constitutes rulemaking surely is not. Furthermore, it 
is almost a canon of administrative law that courts should 



56id. 

57id. at 66. 

58id. 

59id. 

60id. 



314 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

defer to an agency's interpretation of its own regulation 
unless that interpretation is demonstrably irrational. 61 
Moreover, it is clear that, in devising the OSHA-OSHRC 
administrative scheme. Congress intended merely to give to 
the independent review commission only one of the functions 
that traditionally more integrated agencies exercise. Had 
Congress intended an even more radical departure-- such as 
giving the Commission authority both to interpret regulations 
and to adjudicate disputes arising under them-- it would seem 
to demand more specificity and clarity of statement on that 
point than the OSHAct's legislative history reveals. 

But that notion itself seems basically incompatible with 
the chief purpose that has frequently been cited for this 
administrative division. As unedifying as the legislative 
history here may be, one thing does seem clear: Congress did 
not want the framer of the rule to decide disputes arising 
under the rules that he had formulated. It is equally 
apparent that Congress did not intend that the adjudicator be 
able to formulate the rules on which he would then sit in 
judgment. What the First Circuit sought to do here is what 
courts should do whenever they are called upon to discover 
legislative purpose, legislative intent-- particularly when 
that purpose, that intent may not be readily discernible from 
the language of the statute: to give force and effect to the 
legislation so as not to defeat the legislature's overall 
aim. The judicial inquiry in such a case as this one then is 
simple: What was the legislature's purpose, its intent in 
separating these functions? The answer is almost deceptively 
simple as well-- to remove the resolution of adjudicatory 
challenges from the control of the rulemaker and, as a 
corollary, to remove the rulemaking responsibilities from the 
control of the adjudicatory authority. To permit the 
Commission to "rewrite" an OSHA regulation in this way and 
then to decide that Amorello does not violate that regulation 
would be to permit what Congress had legislated to prevent. 



61 See, e.g. , UDALL v. TALLMAN, 380 U.S. 1, 16-17, 85 S. 
Ct. 792, 13 L.Ed. 2d 616 (1965). 



SPLIT ENFORCEMENT MODEL 315 

B, Similar Judicial Responses 

The position of the First Circuit has been taken by 
other courts. The Fifth Circuit also has maintained that, in 
choosing between the Secretary's interpretation of his 
agency's regulation and OSHRC's construction, the Secretary's 
interpretation, if reasonable should govern. One case, 
Brennan v. Southern Contractors Service 62 involved an OSHA 
rule, which required use of a safety net where the use of 
other safety devices would be impractical. After the fatal 
fall of one of its employees. Southern was cited for 
violating the regulation. A safety expert testified before 
the ALJ that safety belts rather than safety nets would be 
practical. 63 in light of that testimony, the ALJ 
determined that the regulation required safety nets "only if 
one of the other safety devices is impractical, "64 whether 
it was being utilized or not. The Commission affirmed the 
ALJ's construction of the regulation. 

The Fifth Circuit reversed the Commission, holding that 
the Commission's interpretation would undermine the purpose 
of the OSHAct — "to protect the health and safety of workers 
and to improve physical working conditions on employment 
premises. "65 Significantly, the Court also held that "the 



62492 F.2d 498 (5th Cir. 1974). See also SCHWARZ- 
JORDAN, INC., 777 F.2d 195 (5th Cir. 1985) ("This court has 
held that the Secretary' s interpretation is controlling as 
long as it is one of several reasonable interpretations, 
although it may not appear as reasonable as some others.") 
Id. at 197. 

63id. at 500. 

6429 C.F.R. §125. 105(a) (1973). 

65492 F.2d at 501. But see FIEGEN, infra. See also , 
EVERGLADES SUGAR REFINERY V. DONOVAN. 685 F.2d 1076, 1081 
(5th Cir. 1981). Cf . , H.B. ZACHIRY CO. v. OSHRC, 638 F.d 
812, 817 (5th Cir. 1981). But see , COCA-COLA CO. v. 
ATCHISON, TOPEKA AND SANTA FE RY. CO., 608 F.2d 213, 222 (5th 
Cir. 19 79); USERY v. KENNECOTT COPPER CO., 577 F.2d 1113, 
1119 (10th Cir. 1977); DIAMOND ROOFING CO. v. OSHRC, 528 F.2d 
645, 649 (5th Cir. 1976). 



316 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

promulgator's interpretation is controlling as long as it is 
one of several reasonable interpretations. "66 

A Tenth Circuit panel reached a similar conclusion in 
Brennan v. OSHRC and Kesler and Sons Construction Company . 6 7 
That case, however, involved the construction of a statutory 
term rather than a regulation. Initially Kesler had been 
cited for noncompliance with certain OSHA-mandated safety 
standards. The citation ordered immediate abatement for all 
violations and assessed penalties on the company. Kesler did 
not contest the citation. The company was then later cited 
for failing to correct the violations. Kesler contested the 
notification of failure to correct and the penalty 
assessment. Following the required hearing, the ALJ found 
that the company had failed to correct the cited violations, 
yet he reduced the penalty. On review by the Commission, 
OSHRC reversed the ALJ. The OSHA-OSHRC dispute centered on 
section 9 of the statute, which provides that a citation fix 
a reasonable time for abatement. 68 The citation issued by 
the Secretary had ordered immediate abatement. The 
Commission, however, maintained that there could be no 
reinspection until the expiration of the fifteen-day period 
during which the employer was allowed to contest the 
citation. In the court's view, the Commission's 
interpretation of the statute would amount to permitting an 
employer "fifteen working days to correct a condition calling 
for immediate abatement, even though he did not contest the 
citation. "69 in siding with the Secretary, the court said, 
"the interpretation given a statute by the administrative 
agency charged with its enforcement should be accepted by the 
courts, if such interpretation be a reasonable one. And this 



66492 F.2d at 501 . 

67513 F.2d 533 (10th Cir. 1975). 

6829 U.S.C. §658(a) (1982). 

69see, 29 U.S.C. §659(a): "If, within fifteen working 
days from the receipt of the notice issued by the Secretary, 
the employer fails to notify the Secretary that he contests 
the citation or the proposed assessment of penalty, and no 
notice is filed by an employee or representative of 
emp 1 oy ee s . . . w i th in such time, the citation and the 
assessment, as proposed, shall be deemed a final order of the 
Commission and not subject to review by any court or agency." 



SPLIT ENFORCEMENT MODEL 317 

is true even though there may be another interpretation of 
the statute which is itself equally reasonable. "70 

By their decisions, these courts have recognized that 
interpreting agency regulations and statutory provisions is 
an essential aspect in the formulation of policy. That 
responsibility-- the formulation of policy-- these cases 
suggest, is vested in the Secretary and the Department of 
Labor. 

Other courts have been even more explicit in maintaining 
that the policymaking responsibilities under the OSHAct 
reside with the Secretary. Examples of this view come from 
the Ninth Circuit and, more recently, from both the Third and 
the District of Columbia circuits. 

In a case that involved the ability of the Secretary of 
Labor to compromise penalties that had been assessed by a 
Commission order, the Ninth Circuit held that: 

Policy-making is arguably a by-product of the 
Commission's adjudication. But the Act imposes 
policy-making responsibility upon the Secretary, not the 
Commission. Whatever "policies" the Commission 
establishes are indirect. Only those established by the 
Secretary are entitled to enforcement and deference in 
court. 71 



In a similar case, the Third Circuit, reviewing the 
legislative history of the OSHAct, concluded that "the Review 
Commission's mandate was strictly limited to 
adjudication. "72 The court amplified its position, saying 
that contrary to assertions of the Commission "that it is a 
major policy-making body under OSHA, the fact is that the Act 
confers all rulemaking responsibilities on the Secretary, not 
the Commission. "73 The court went on to hold that "the 

Review Commission was designed strictly as an independent 
adjudicator, with no rulemaking authority other than for 



70513 F.2d at 554. 



71 DALE MADDEN CONSTRUCTION INC. V. HODGSON, 508 F.2d 278 
(9th Cir. 1974). 

72MARSHALL V. SUN PETROLEUM PRODUCTS, 620 F.2d 1176 (3rd 
Cir. 1980). 



73ld. at 1183. 



318 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

procedural hearings, no direct policy role in administering^ 
the Act "74 

That position is also echoed in a recent decision of the 
District of Columbia Circuit. According to that court, 
citing Atlas Roofing , 75 "the [OSHjAct creates public rights 
that are to be vindicated by the Secretary through government 
management and enforcement of a complex administrative 
scheme.... [W]e are persuaded that enforcement of the Act is 
the sole responsibility of the Secretary. "76 

What these cases demonstrate is that, even though 
Congress may have departed from the traditional 
administrative structure when it divided rulemaking and 
adjudicatory authority between these two agencies, it did not 
depart so radically from the traditional administrative 
functions that it would, at the same time and with no 
legislative statement to indicate why, also divest the 
rulemaker of the authority to be the interpreter of its own 
rules and of the statute pursuant to which they have been 
promulgated. 



C. The Contrary Position 

It is by no means the unanimous judicial position that 
the Secretary's view is entitled to greater deference when it 
differs from that of the Commission. Several courts have, in 
fact, sided with the Commission and maintained that OSHRC was 
intended to exercise an independent judgment on the meaning 
of OSHA-promulgated standards. As a matter-of-fact, a 
majority of the circuits that have considered this issue 
appear to have sided with the Commission. 77 

Yet nothing in the legislation itself, the debates, or the 
accompanying reports can support such a conclusion. 
Nonetheless, the cases are there. 



74id. at 1184. 

75ATLAS ROOFING CO., INC. v. OSHRC, 430 U.S. 442 (1977). 

76oiL, CHEMICAL AND ATOMIC WORKERS v. OCCUPATIONAL 
SAFETY AND HEALTH REVIEW COMMISSION, 671 F.2d 643, 649 (D.C. 
Cir. 1982). 



77For example, the Fourth, Sixth, Eighth, and possibly 
Second circuits favor the Commission. The First, Fifth, and 
Tenth circuits favor the Secretary. See generally , text and 
accompanying notes at pp. . 



SPLIT ENFORCEMENT MODEL 319 

Brennan v. Gilles and Cotting, Inc. 78 is one such case. 
Gilles and Getting, Inc. (Gilles) was the general contractor 
on a construction project at NASA's Manned Space Flight 
Center in Greenbelt, Maryland. Gilles had subcontracted the 
glass construction work on the project to Southern Plate 
Glass Company (Southern). Following the collapse of a 
scaffolding which caused the death of two workers on 
Southern's payroll, the Secretary of Labor issued citations 
against both Southern and Gilles for "serious violations"79 
of the safety regulations governing scaffolds. 80 Southern 
did not contest its liability, but Gilles challenged both the 
citation it had received and the proposed penalty. The ALJ 
decided two things: first, that the fatal scaffolding had 
been constructed in violation of OSHA's safety regulations; 
and second, that under the statute, Gilles, as the general 
contractor, was liable for safety violations that posed 
hazards to the employees of his subcontractors. 81 in a 
split decision, OSHRC reversed the decision of the ALJ. In 
exonerating Gilles, the Commission essentially maintained 
that none of Gilles's employees was "affected" by the 
hazardous condition of the scaffolding and that Gilles should 
not be held jointly responsible for the dangers that 
Southern's scaffolding created for Southern's employees. 82 
The Secretary appealed. 

In reviewing OSHRC' s decision, the Fourth Circuit 
limited its inquiry to the issue of "whether, in addition to 
a subcontractor, a general contractor should be responsible 
for safety violations hazardous to a subcontractor's 



78504 F.2d 1255 (4th Cir. 1974). 

79see, 29 U.S.C. §666(j) (1982). 

8029 C.F.R. §1926.451 (1984). 

81504 F.2d at 1256, 57. According to the ALJ, Gilles 
was legally responsible under the Act because (1) Gilles's 
workers, as well as those of other subcontractors, had 
"access" to the hazard and could be exposed to injury from 
the scaffolding's collapse, and (2) in construction projects 
where subcontractors are also used, it is logical and 
necessary that overall safety and accident prevention be the 
responsibility of the general contractor. 

82id. at 1257. 



320 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

workers. "83 in other words, the issue reduced to a question 
of statutory interpretation: whether the term "employer" as 
used in the Act should be interpreted to cover general 
contractors as °joint emp 1 oy e r s ' . . . or ^statutory 
employers ' . "84 

The court readily admitted that the statute does not on 
its face resolve the question. 85 The answer, therefore, 
must be sought by divining the purpose of the legislation. 
In attempting so to do, the court rejected the mechanical 
application of the common-law definitional tests for 
"employee", as the Commission had urged. Because the states 
vary so in their "common" law analyses of "employee," such an 
approach would have been unavailing. The court correctly 
pointed out that "[a]s a Congressional enactment of 
nationwide application, OSHA requires a single consistent 
definition of ^employer' throughout the country so that there 
will be uniform application of this national legislation in 
all states. "86 According to the court, the operative 
consideration, therefore, should be "the purpose of the 
statute and not the technical distinctions of the common 
law. "87 Having concluded that the "purpose of the statute" 
should inform the construction to be given "employee" in this 
case, the court nevertheless decided that the question of 
whether the general contractor should be concurrently liable 
for his subcontractor's workers "can be answered either 
way. "88 it then inexplicably held that "since Congress has 
chosen the Occupational Safety and Health Review Commission 
as the enforcing agency [emphasis added], the choice between 
these two alternatives is appropriately committed to it. "89 
Rather summarily this court rejected the Secretary's view 



83id. at 1260. 

84id. 

85id. 

86id. at 1261 . 

87id. 

88id. 

89id. at 1261-62 



SPLIT ENFORCEMENT MODEL 321 

that it is the Department of Labor to which such discretion 
is committed. 

The court conceded that the Secretary's rulemaking 
authority is broad. However, it here maintained that "it is 
the power to adopt rules or policies in adjudication 
[emphasis in original] which we are concerned with in this 
case. The statute vested adjudicatory functions in the 
Commission. "90 The court examined the legislative history 
and maintained that: 

As is made clear by the lengthy Congressional debates 
over enforcement procedures and the successful floor 
amendment withdrawing the Secretary's authority over 
adjudications... Congress deliberately created the 
Commission separate and independent of the Secretary. 91 

Yet that does not answer the relevant questions. There 
is no dispute that Congress created the Commission to be 
"separate and independent of the Secretary." The real 
question is how are these two concededly independent agencies 
intended to administer one regulatory program. The Fourth 
Circuit, it seems to me, misconstrues the intention of 
Congress in at least four respects. 

First, contrary to the court's assertion. Congress did 
not choose the Occupational Safety and Health Review 
Commission as the "enforcing agency." The authority to 
enforce the statute clearly resides with the Secretary and 
OSHA. Second, the fact that adjudicatory authority is 
withheld from the Secretary does not necessarily mean that 
Congress also intended to withhold from the Secretary the 
authority to decide who might properly be subject to the 
coverage of the Act and its regulations. Third, the court 
worries that accepting the Secretary's approach would render 
the Commission as "little more than a specialized jury, an 
agency charged only with fact-finding. "92 Even if that be 
true, it is a choice that the legislature apparently has 
made, and no court should seek to re-allocate that 
legislatively^ determined division of responsibility. 
Finally, the court's assertion that "it is the power to adopt 
rules or policies in adjudication which we are concerned with 
in this case" ignores what the Commission has actually done 
in this instance. This is not an instance where the 
Commission has adopted "rules or policies" with respect to 

90id. at 1262. 

91 Id. 



92id. 



322 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

how the adjudication would proceed before the Commission. 
That, it seems to me, would occasion no problem at all. If 
that were the case, the Commission essentially would be doing 
what almost all other agencies are empowered to do-- to adopt 
rules of procedure to aid in discharging its duties and 
responsibilities. Rather, what the Commission has done here 
instead, and done with the approval of the court, is to 
decide what the general and substantive reach of a standard 
should be. And that is clearly a legislative determination, 
not an adjudicatory one, and as such, it is one for the 
Secretary to make. It is true, as the court points out, that 
"Congress intended that [the Commission] would have the 
normal complement of adjudicatory powers possessed by 
traditional agencies .... "93 But it is also true that 
Congress intended that the Commission have only adjudicatory 
powers. At least, in that respect, the Commission-- and with 
respect to legislative authority, OSHA-- are not traditional 
agencies. This decision of the Fourth Circuit would upset 
this congressional determination and, thereby, confer upon 
the Commission more authority than Congress intended it to 
exercise. 

Other circuits have come to substantially similar 
conclusions when confronted with a disagreement between the 
Secretary and the Commission. The Eighth Circuit has also 
concluded that, in such a circumstance, it is the Commission 
to whom the courts should defer. This court has gone so far 
as to say that "the Secretary may recommend an interpretation 
of a regulation to the Commission, but his recommendation 
does not necessarily control the Commission's conclusion. "94 

An early case from the Second Circuit appeared to adopt 
the view that it is the Secretary's determination that should 
be accorded special weight. 95 in one of that court's first 
enforcement proceedings under the OSHAct, it concluded that, 
because "Congress apparently placed primary reliance upon 
promulgation by the Secretary of specific regulations... [i]t 
is especially important that these regulations be construed 
to effectuate congressional objectives. "96 That statement 
would seem almost inexorably to place the Second Circuit on 



93id. 



94BRENNAN v. OSHRC and RON M. FIEGEN, INC., 513 F.2d 713 
(8th Cir. 1975). 



95BRENNAN V. OSHRC and GEROSA, INC., 491 F.2d 1340 (2d 
Cir. 1974). 



96491 F.2d at 1343. 



SPLIT ENFORCEMENT MODEL 323 

the side that advocates deferring to the Secretary on matters 
of interpretation. A more recent Second Circuit case, 
however, casts some doubt on such an inference. 97 

Western Electric, Inc. had been cited by the Secretary 
for violating an OSHA emergency regulation that required 
employer testing for the presence jot vinyl chloride, a known 
carcinogen. Western Electric did not begin immediately to 
test for the presence of vinyl chloride because the company 
hygienist concluded that the plant did not use the raw 
materials that were suspected of producing the gas. 
Nonetheless, because of his concern for the workers' safety, 
the hygienist monitored the area he believed to be most 
susceptible to releasing vinyl chloride. OSHA, however, 
cited Western Electric for failing to monitor other areas as 
well. The ALJ, "relying on the plain language of the 
standard, which requires physical monitoring of any operation 
releasing vinyl chloride gas... held that Western Electric 
had violated the standard by failing to monitor [other 
areas], "98 The review commission, however, set aside the 

AL J ' s findings, maintaining that Western Electric could 
"reliably predict from the physical circumstances that the 
concentration of vinyl chloride would be well below the 
danger level set by the Secretary. "99 The Secretary, on the 
other hand, argued that such an interpretation of the 
standard was unreasonable in that "the standard expressly 
requires physical monitoring of every operation in which 
vinyl chloride is released . . . ."100 

A Second Circuit panel reversed the Commission's 
decision. The reversal came, however, because the court 
determined that the Commission's interpretation was 
unreasonable. The court seemed to imply that, had the 
Commission's interpretation been a "more reasonable" one, it 
might have upheld the determination. The panel remarked 
that: 

this court has consistently held that its role is to 
decide whether the Commission's interpretation of 

the regulation is unreasonable and inconsistent with 



97MARSHALL V. WESTERN ELECTRIC, 565 F.2d 240 (2d Cir. 
1977). But see, BROCK v. SCHWARZ- JORDAN, INC., 777 F2d 195 

(5th Cir. 1985). 

98565 F.2d at 243-44. 

99id. at 244. 

lOOid. 



324 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

its purpose, the normal standard for review of the 
interpretation of a regulation by an agency charged 
with its administration. 1 O"! 

If what the court intended to suggest here is that, so long 
as there are reasonable but different interpretations of a 
regulation by OSHA and the review commission, it could or 
would enforce the review commission's interpretation, I think 
the court is wrong. That the review commission might give 
the regulation a reasonable interpretation is irrelevant. 
What is relevant is that Congress has reposed that authority, 
the authority to decide what a standard means in the 
Secretary, and it should not matter that others could or 
would be equally reasonable in their interpretations of the 
same standard. It is not their decision to make. 

Such an attitude, I submit, reveals a fundamental 
misunderstanding of what Congress intended when it divided 
the administrative functions in this novel way. While it may 
be true that Congress did not wish to have the administrative 
functions combined as they are in the traditionally arranged 
agencies, there is no evidence whatsoever to indicate that 
Congress intended the Commission to set the substantive 
standards or to substitute its judgment for that of the 
Secretary, the administrative officer to whom responsibility 
for the substantive standards was committed. However sparse 
the legislative history may be-- and it is true that it could 
have been more helpful-- logic and administrative efficiency, 
if nothing else, argue that the role of the Commission is to 
adjudicate alleged violations of the standards, nothing more. 
What the standards mean, to whom they should apply-- those 
are legislative determinations, decisions that, absent a 
congressional directive to the contrary, are ordinarily 
vested in the promulgator of the rule. It then is an obvious 
usurpation for either the Commission or a reviewing court 
unilaterally to deprive the Secretary of that authority. 

It is clear from the legislative history of the OSHAct 
that Congress, in trying to settle the quarrel over how the 
administrative functions would be allocated, was concerned 
primarily with resolving a political problem. By adopting 
this "split-enforcement" arrangement. Congress solved the 
immediate political problem-- who would make the rules, who 
would resolve disputes arising from those rules. Yet it is 
not clear that Congress solved the "administrative" problem 
it had been so preoccupied with. Perhaps while focusing too 



lOTld. See also, BRENNAN v. OSHRC and GEROSA, INC., 
491 F.2d 1340, 1344 and n. 1 (describing as "simplistic" the 
thought that the meaning of a regulation might best be 
fathomed by its author, here the Secretary). Accord , 
BRENNAN v. OSHRC and UNDERHILL CONSTRUCTION CORP., 513 F.2d 
1032 (2d Cir. 1975). 



SPLIT ENFORCEMENT MODEL 325 

critically on the who . Congress may have ignored some of the 
more important ramifications of the choice it had settled on, 
or perhaps it did not fully appreciate the significance of 
the choices it had made or their likely consequences. It 
might have been expected that, when a single regulatory 
program is divided between two agencies, some conflicts would 
develop. Nowhere in the legislative history, however, is any 
thought or discussion devoted to that possibility, that 
eventuality. No guidance is provided regarding how potential 
conflicts should be resolved. It is almost as though 
Congress were totally oblivious to the possibility, the 
likelihood that tension and some measure of confusion would 
develop between these two agencies. Neither the agencies 
involved nor the courts, however, are given any legislative 
indication of how Congress intended potential institutional 
conflicts to be resolved. Simply to repose rulemaking and 
enforcement authority in one agency and adjudicatory 
authority in another may have seemed, at first, a neat 
resolution to a vexing political problem. It, however, was 
but the beginning of several others. 

V. INSTITUTIONAL CONFLICTS: The MSHAct 

Even though Congress did attempt to clarify the division 
of responsibilities between the Mine Safety Administration 
and the Mine Safety and Health Review Commission, there 
nonetheless have been some "turf fights" between the two 
agencies. The disagreements, however, do not appear to have 
been as frequent as those between OSHA and OSHRC. In one 
case, a court indicated that a bulletin from the Labor 
Department interpreting a provision of the MSHAct "is 
entitled to deference unless it can be fairly said not to be 
a reasoned and supportable interpretation of the Act. "102 
Because that case involved a situation where the Secretary 
and the review commission-- although not the administrative 
law judge-- were in agreement on the interpretation of the 
act, it provides no basis for determining how the court would 
have decided the issue had the two agencies disagreed 
regarding the interpretation. 

At least one court has had the opportunity squarely to 
face that issue, but the court declined to do so because, as 
the court put it, "the Commission's construction [was] 
plainly incorrect and insupportable by the terms of the 
Act, "103 The case involved a question regarding the right of 



102MAGMA COPPER COMPANY v. SECRETARY OF LABOR, 645 F.2d 
694, 696 (9th Cir. 1981 ). 

103UNITED MINE WORKERS OF AMERICA V. FEDERAL MINE SAFETY 
AND HEALTH REVIEW COMMISSION, 671 F.2d 615 (D.C. Cir. 1982). 



326 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

a representative of mine workers to participate in so-called 
"spot" inspections of the mines without suffering a loss of 
pay, 104 The Commission had held that the representatives 
were entitled to pay only for what are called "regular" 
inspections, that is, inspections of a mine in its entirety. 
The Secretary's position was that the act entitled the 
representatives to receive their pay-- often called walk- 
around money-- for any inspection they observed. 

The court sided with the Secretary's reading of the 
statute. But it felt no necessity to decide the more general 
question, observing that: 

, . . [the] Secretary of Labor has raised the issue 
of whether, as a general procedural matter, his 
interpretation of the Act or that of the Commission 
is entitled to "special weight." The Court need 
not decide what weight should generally be afforded 
to a decision by the Commission relative to that 
given a conflicting interpretation by the 
Secretary, since in this instance, the Commission's 
construction is plainly incorrect and insupportable 
by the terms of the Act and therefore entitled to 
no deference. 1 05 

Nonetheless, in pressing its claim before the D.C. 
Circuit, the Secretary made many of the same arguments that 
have frequently been advanced in the OSHA-OSHRC dispute: the 
rulemaking, enforcement, and prosecution powers under the 
MSHAct are assigned to the Secretary. It is the Secretary 
who promulgates safety and health standards, carries out 
statutorily mandated inspections, enforces citations and 
orders, proposes and collects civil penalties, and defends 
his actions before administrative and judicial tribunals. 
The Commission, on the other hand, is given but three 
functions, all of which are analogous to judicial functions: 
to adjudicate contested cases, to assess civil penalties, and 
to approve settlements in cases pending before it. 106 

The Secretary also maintains that deference should be 
paid to the Secretary's construction of the act's provisions 
because "as opposed to the Commission, he was involved in the 



10430 U.S.C. §813(a) & (f) (1982). 

105671 F.2d at 623, n. 26. 

1 06 see Brief of Petitioner (Secretary of Labor) at 52, 
MARSHALL v. UMW, 671 F.2d 615 (D.C. Cir. 1982). 



SPLIT ENFORCEMENT MODEL 327 

development of the Act. The Commission, on the other hand, 
is a creature of the Act. "107 

Even though the court did not resolve the deference 
issue in the walk-around money case, the Labor Department 
considers the case a major victory for the Secretary and the 
Department in clarifying the agencies' respective roles. 108 

Another "turf" battle between the Secretary and MSHRC 
has now made its way to the District of Columbia Circuit for 
resolution. 1 09 The issue in this case is whether, under the 
MSHAct, the Secretary may cite the owner-operator of a mine 
for a violation committed by its independent contractor. 1 1 
The Secretary's says yes. MSHRC' s answer is no. According 
to the Secretary, there is a history of judicial precedent 
which endorses his right under the act to determine whom to 
prosecute-- precedent which the Commission, attempting to 
enhance its "policymaking" role under the act, has chosen to 
ignore. 1 1 1 



107id. at pp. 53-54. 

108interview with Cynthia Attwood, Associate Solicitor, 
and Michael A. McCord, Counsel, Appellate Litigation, Mine 
Safety and Health Administration, Office of the Solicitor, 
Arlington, Virginia (September 7, 1985). 

109DONOVAN V. CATHEDRAL BLUFFS, Docket No. 84-1492, 
(D.C. Circuit). 

1 1 O see , Brief of Petitioner (Secretary of Labor), 
DONOVAN V. CATHEDRAL BLUFFS, Docket No. 84-1492, filed, 
January 18, 1985, District of Columbia Circuit. 

1 1 1 CATHEDRAL BLUFFS is, among other things, a case 
regarding the extent of the Secretary's "prosecutorial 
discretion" in enforcing the Mine Act and how the exercise of 
that discretion should be viewed by the Commission. The 
Secretary's view is that the Act gives him broad discretion 
to determine against whom to enforce the provisions of the 
Act and that the Secretary's determination cannot be 
overturned without demonstrating that he has abused that 
discretion. Oral argument was held in DONOVAN v. CATHEDRAL 
BLUFFS SHALE OIL CO. on September 13, 1985. 

The case was decided on July 29, 1986, sub, nom. BROCK 

v. CATHEDRAL BLUFFS, U.S.App.D.C. , F2d. 

(D.C. Cir. 1986). On the deference question, the court sided 
with the Secretary, saying at n.2: "We see no reason to 
depart from the view we announced, with regard to the Mine 



328 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

But the number of such disputes between MSHA and MSHRC 
pales in comparison to those between OSHA and OSHRC, What 
can account for such differences? Why does this arrangement 
appear to have worked, with minimal difficulty in the one 
case, and to have been so fraught with problems in the other? 

To be sure, the mine-safety statute was enacted seven 
years after the OSHAct. OSHA and OSHRC are the first major 
regulatory agencies to have to contend with so complete a 
separation of functions. There are always unforeseen 
problems in being first. FMSHA and FMSHRC have had the 
advantage of observing and, therefore, avoiding some of the 
initial mistakes that plagued the occupational-safety 
agencies. Yet that fact alone may not explain all 
differences. 

On the deference question, part of the explanation for 
the relative absence of disputes between FMSHA and FMSHRC 
may well be attributed to the legislative history of the mine 
statute, which directs both the Commission and the courts to 
accord "weight" to the Secretary's determinations. 1 1 2 With 
such a statement. Congress at least went on record, 
suggesting that, as a primary matter, the Secretary's 
construction of this statute and of the regulations 
promulgated pursuant to it are to be highly valued. Of 
course, such a statement does not in and of itself implement 
the congressional intention, but it does minimize the 
potential for conflicts, and, at the same time, it raises a 
heavy presumption against anyone who would ignore or discount 
the Secretary's interpretation. It may not be worth much, 
but it must surely be worth more than no congressional 
directive at all. 

There are other possible reasons to explain the 
relatively smooth accommodations that have been achieved by 
FMSHA-FMSHRC. Chief among them may be the narrower scope of 
their activities and responsibilities. The FMSHAct governs 
only mining. There is much more finiteness in its scope. 
The population is a limited one-- miners and mine operators. 
And the health and safety hazards to which mining exposes its 
workers tend to be the same, wherever the mine is located. 
The OSHAct, on the other hand, governs everything else, and 
everything else is a vast universe of companies, industries, 
firms, enterprises, you name it. Their only commonality may 
be that they all have employees. Mine-safety officials 
emphasize the significance of this difference between 
themselves and their OSHA counterparts. According to one 



Act, in Carol ina Stall te , which leaves interpretive 
discretion where it normally resides, with the policy-maker 
rather than the adjudicator." 

112566, note supra at , and accompanying text. 



SPLIT ENFORCEMENT MODEL 329 

FMSHA official, his agency can obtain at almost any moment a 
virtually precise record of the numbers of mines and miners 
subject to its jurisdiction. With such discrete 
responsibilities, he maintains, FMSHAct agencies can become 
really expert in the industry and in the regulatory matters 
under its supervision. 1 1 3 

Not only that, but the regulatory powers of FMSHA may 
also explain why the FMSHAct agencies have not been as 
beleaguered by conflicts as OSHA and OSHRC have been. Mine 
inspectors possess enormous power under the mine-safety 
statute and, therefore, may be able, in the first instance, 
to induce a greater degree of cooperation from mine 
operators. For example, under the statute, an inspector's 
entry onto the mine is authorized. 1 1 4 Furthermore, the 
statute prohibits advance notice of a mine inspection. 1 1 5 it 
also empowers the Secretary to order an immediate abatement 
of hazards detected and to close off access to a mine until 
the violation is abated.116 in short, a mine-safety 
inspection official can exact almost immediate compliance 
from a mine operator. OSHA inspectors, on the other hand, 
cannot obtain such immediate results. In fact, OSHA 
citations to abate can be stayed until after a decision by 
OSHRC. So, in an OSHAct case, there may be little reason 
initially to comply with the Secretary's citation. One has 
little to lose. But, because of the immediacy of the FMSHA 
inspector's citation and unless the operator believes the 
citation to be utterly frivolous or egregious, there is every 
reason to comply at once. There is, in fact, too much to 
lose, particularly when one's mining operation could be 
halted or severely curtailed. MSHAct officials maintain, 
however, that there is little likelihood of a frivolous or 
egregious citation, because all their inspectors are or were 
themselves miners, who generally would be more capable of 
making realistic assessments of mining hazards than would be 
inspectors unschooled in the industry. 1 1 7 



1 1 3interyiew with Frank O'Gorman, Federal Mine Safety 
and Health Administration, Arlington, Virginia (February 3, 1986). 

11430 U.S.C. §813(a). 

115id. 

116id. 



117interview with Frank O'Gorman, Federal Mine Safety 
and Health Administration, Arlington, Virginia (February 3, 1986). 



330 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

VI. GREATER DUE PROCESS? 

The institutional conflicts-- the problem of deference-- 
has been a great problem with the split-enforcement model, 
at least with the OSHAct agencies. But the deference 
problem, the problem of institutional conflicts surfaced only 
after the passage and implementation of the OSHA statute. 
Perhaps the problem should have been forecasted or 
anticipated. But, for whatever reasons, the issue did not 
figure in the legislative discussions. What did figure very 
prominently in the legislative discussions-- with respect to 
both the OSHAct and the FMSHAct-- was the notion that such a 
strict separation of rulemaker from the adjudicator would 
enhance the prospects for due process and thereby instill 
greater confidence in the regulatory programs. The 
legislative proponents of both statutes focused much of their 
discussion and attention on the enhanced prospects for due 
process that this split-enforcement scheme was expected to 
ensure. Have those predictions been borne out? Does the 
split-enforcement arrangement ensure, any more so than the 
traditional, cohesive agency structure, that due process will 
be enhanced, that the regulatory programs themselves would be 
perceived to be more credible? 

It is very difficult-- if not impossible-- empirically 
to demonstrate that the one arrangement is "better" than the 
other in providing due process. Even though the traditional 
model has withstood constitutional challenges to its housing 
all the administrative apparatus under one roof,118 the 
impression persists that no agency that may, at the same 
time, be responsible for licensing, policing, adopting rules, 
and deciding challenges can be completely fair and objective 
when those rules or policies are challenged before it. That 
impression appears to be based on the view that no matter how 
many bars, barriers, or Chinese walls are erected to shield 
the policymakers and the prosecutors from the quasi- judicial 
authorities, the agency itself still maintains a vested 
interest in ensuring that a particular result is reached, 
that particular policies are protected or advanced. Whether 
that assumption is provable or not, it is^ a frequent 
impression. 

The answer then may well be that it does not ultimately 
matter whether the split-enforcement model does, in fact, 
ensure any more due process or instill any more confidence 
than the traditional administrative arrangements. What may 
matter more is what advantage one thinks or believes the one 



118see, e.g. WITHROW v. LARKIN, 421 U.S. 35 (1975); 
FEDERAL TRADE COMMISSION v. CINDERELLA CAREER AND FINISHING 
SCHOOLS, 404 F.2d 1308 (D.C. Cir. 1968). 



SPLIT ENFORCEMENT MODEL 331 

model may possess over the other. And that, of course, 
depends on whom one talks to and on what one's interests in a 
particular regulatory program may be. 

One industry observer maintains that the split- 
enforcement model with the consequent independent adjudicator 
"balances" the sometimes over-aggressiveness of the 
rulemaker, in this instance — the OSHA rulemaker. A separate 
and independent adjudicator evens out the odds.119 implicit 
in that observation, it seems to me, is the belief that 
recourse to an agency other than the one that promulgated the 
challenged standard is a sine qua non of due process. 
According to this observer, "there is a good argument to be 
made that the "policeman' should not also be "judge' and 
"jury'; he's got too much to lose. How can he be "right' in 
issuing a citation on one side and "wrong' when he 
adjudicates it on the other?"120 

This observer further maintains that even greater due 
process would be assured if members of the review commission 
are conversant, if not necessarily expert, in specific health 
and safety areas. If the adjudicator had more of a working 
scientific knowledge or knowledge of particular industries 
and their hazards, the Commission could be expected to reach 
a more "realistic" assessment regarding alleged violations. 
According to this observer, as it now stands, many industry 
officials simply calculate their costs of compliance to 
determine which is more economical — acceding to OSHA's rule, 
however irrational one might think it or challenging the rule 
before the Commission and perhaps in the federal courts. 121 
That is, due process becomes a bottom-line consideration, and 
it sometimes may be cheaper (better?) to switch than fight. 

As one might expect, an observer from organized labor 
has a somewhat different view. Labor, it may be recalled, 
advocated vesting all the administrative powers of the OSHA 
program in the Department of Labor. According to one labor 
official, it is not that the independent adjudicator ensures 
that there will be more due process. What it does ensure-- 
at least, what has happened with the OSHAct-- is a process 
that was not originally intended. "Too often," she 
contends,, "whdt OSHRC has engaged in is a review not of the 
law, but of the facts, of OSHA's judgment of the risks and 
hazards, and that was never contemplated when the statute was 



'I "I ^Interview with David Sarvadi, Vice President, A.F. 
Meyer and Associates, McLean, Virginia (December 16, 1985). 

121id. 



332 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

adopted. "122 in addition, she also contends that .tihe 
Commission's willingness to engage in those factual reviews 
has led to interminable delays in disposing of some OSHA 
citations. "Some cases from 1978," she says, "still remain 
unresolved. Can that honestly be called more due process. 
If so, for whom?"123 

Despite those criticisms, there are some government 
officials who do advocate a more general use of the split- 
enforcement model. 124 in fact, the Associate Solicitor at 
MSHA believes the split-enforcement model is much to be 
preferred. She concedes that there may be some sacrifices 
in efficiency and policy coordination. Nonetheless, she 
maintains that those sacrifices are far outweighed by the 
benefits that are derived from having the "institutional 
conflicts" on the public record for examination, discussion, 
evaluation. Intra-agency disputes, she maintains, are 
frequently resolved with no public awareness of the 
considerations that may have informed the resolutions. She 
believes that it is much more likely that resolutions 
achieved in a split-enforcement arrangement are achieved 
openly and with more public knowledge and understanding of 
the compromises and accommodations reached. 125 of course, 
this unqualified endorsement of the split-enforcement model 
comes from one whose experience with it generally has been 
very good, and that may well be attributable to both the 
discreteness of the mine-safety program and the clarity with 
which its congressional proponents expressed themselves on 
the division of authority. 

From one whose agency's experiences with the split- 
enforcement model have not been uniformly good, there comes 
neither a wholesale condemnation nor an aversion to its more 
general use. Rather there is an insistence that any future 
programs employing the split-enforcement model be much more 
carefully drafted so that it is clear what each agency's 



1 22interview with Peg Seminario, Assistant Director, 
Department of Occupational Safety and Health and Social 
Security, AFL-CIO, Washington, D.C. (February 10, 1986). 

123id. 



124interview with E. Ross Buckley, Chairman, 
Occupational Safety and Health Review Commission, Washington, 
D.C. (August 8, 1985). 

125interview with Cynthia Attwood, Associate Solicitor, 
Mine Safety and Health Administration, Office of the 
Solicitor, Arlington, Virginia (September 7, 1985). 



SPLIT ENFORCEMENT MODEL 333 

responsibilities are. According to this observer, if more 
due process is the desideratum, it should be unarguably clear 
precisely what authority each agency has. 126 Otherwise, 
rather than ensuring more due process, the resulting 
confusion may assure none, 

VII. CONCLUSION 

Is the split-enforcement model to be preferred over the 
more traditional unitary arrangement? In the end, that 
question may well be unanswerable. It, is of course^., 
debatable whether one model is "better" than the other. 
Whatever may be one's attitude about the perceived advantages 
of the split-enforcement model-- greater assurance that due 
process prevails or more confidence on the part of those 
subject to the regulatory authority-- there is indeed a 
greater necessity that split-enforcement programs be more 
carefully designed than the unitary administrative programs. 

If the OSHA experience is any example, and it must be 
some, a major problem likely to confront any regulatory 
program divided between two agencies is that of the inherent 
institutional conflicts that can develop. It might have been 
in 1970 when the OSHA statute was enacted-- and it may still 
be-- a salutary and commendable idea completely to separate 
rulemaking and enforcement powers from the adjudicatory ones. 
Whatever ideas may have informed the original decision-- 
greater confidence in the program, enhanced prospects for due 
process, or simply a quick solution to a troubling political 
problem-- it is now evident that the total separation of 
functions has not worked in the OSHA program as Congress and 
its other champions must have hoped. 

The major oversight in the OSHA legislation, it seems to 
me, though not necessarily in the concept itself, was in 
Congress's failing seriously and carefully to examine the 
possible administrative and judicial difficulties this 
bifurcation of responsibilities would create. It may have 
been possible in 1 970 to ignore the potential problems in the 
expectation (the hope?) that none would develop and that, 
even if some did, the two agencies themselves could solve 
them. That possibility no longer exists. Nor may it be 
possible any longer sanguinely to expect the twelve branches 
of the Court of Appeals to solve these institutional 
problems. To be sure, the Supreme Court could provide a 
resolution, assuming that it considers the problems important 
enough to merit the high court's attention. But not even a 
Supreme Court decision would guarantee that these issues, 
particularly the deference question, would be resolved in the 



126interview with Frank White, Associate Solicitor, 
Occupational Safety and Health Administration, Washington, 
D.C. (August 28, 1985). 



334 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

way the legislature would choose. 1^7 The OSHAct, the 
regulatory program it established, and the review commission 
it created are all creatures of the legislature. The 
legislature, therefore, ought clearly to indicate how it 
intends them all to function. 

As for the prospects of greater due process, it simply 
is not possible at this time to say whether the split- 
enforcement model is better at achieving it. 128 it should 
not be pretended, nor is it here intended to be suggested, 
that the traditional administrative model is not susceptible 
to intra-agency conflicts that may often rival those which 
have been seen to exist with the split-enforcement model. 
Nonetheless, such intra-agency conflicts are more easily, 
even if not more readily, resolved because the ultimate 
responsibility for decision devolves on a single chief 
administrator or a single multi-member agency. The decision 
of that administrator or that agency is definitive, subject 
to reversal only by a court of competent jurisdiction or 
revision by the legislature. The same cannot be said of a 
regulatory program, responsibility for which is divided 
between two agencies. Divided regulatory programs must be 
expected inherently to encounter more administrative 
problems and difficulties than might a similar program housed 



1 27 see , e.g. , CUYAHOGA VALLEY RAILWAY CO. v. UNITED 

TRANSPORTATION UNION, U.S. , 106 S.Ct. 286 (1985). 

Although not specifically addressing the deference issue, 
this recent Supreme Court decision may conceivably augur the 
Court's view on the deference question. In considering 
whether the Commission could prevent the Secretary from 
withdrawing a citation issued by his department, the Court, 
in a per curiam opinion, held that "the Secretary has 
unreviewable discretion to withdraw a citation charging an 
employer with violating the Occupational Safety and Health 
Act." Furthermore, the Court also said that "it is the 
Secretary, not the Commission, who sets the substantive 
standards for the work place, and only the Secretary has the 
authority to determine if a citation should be issued to an 
employer for unsafe working conditions, 29 U.S.C. §658 . . 
. . The Commission's function is to act as a neutral arbiter 
and determine whether the Secretary's citations should be 
enforced over employee or union objections." 

128with only the examples of OSHA-OSHRC and FMSHA-FMSHRC 
from which to reason, it may be premature to attempt any 
generalizations regarding the desirablitity of this model 
over the traditional unitary model. Furthermore, how would 
one determine which model (or which agency operating under 
which model) would represent the "control" group for 
comparison purposes? 



SPLIT ENFORCEMENT MODEL 335 

entirely under one administrative roof. Such a program is, 
in a very real sense, potentially and practically, the 
servant of two masters, and of possibly many more when the 
reviewing courts are counted. No program can be efficient or 
effectively administered in such a divided environment unless 
the responsibilities of each agency are carefully delimited. 

When it enacts a program using the split-enforcement 
model. Congress, therefore, has a special obligation to draw 
the perimeters of each agency's responsibilities. A mere 
declaration or statement that one agency's determinations 
should be given special weight may be sufficient. Such a 
statement appears to have aided in minimizing conflicts 
between MSHA and MSHRC. 

The congressional proclivity to legislate very broadly 
and generally, to leave the details later to be worked out, 
while fraught with potential danger in the traditional model, 
is particularly dangerous when regulatory responsibilities 
are divided between two agencies. Therefore, in any future 
use of the split-enforcement model, the responsibility of the 
rulemaker, the adjudicator, and the reviewing courts should 
be set forth with grater specificity that some recent 
Congresses have been wont to demonstrate. The tendency to do 
less should be resolutely avoided. As a general matter, the 
rulemaker should clearly be created to function as the 
policymaker, and the other participating agents-- both the 
quasi-adjudicatory agency and the courts-- must be required 
to see him that way and to restrain their impulse to usurp 
that role. And once Congress has clarified the 
responsibilities and authorities of the two independent 
agencies, the agencies and the reviewing courts then have a 
concomitant responsibility to ensure that their assigned 
limitations are observed. 

When considering future uses of the split-enforcement 
model. Congress should also refrain from placing too much on 
a program's regulatory agenda. 129 Some of the OSHAct 
agencies' problems may stem from the sheer magnitude of their 
tasks. Likewise, much of the success of the MSHAct agencies 
must be attributed to the manageability of their charge. 

In the area of occupational safety and health, the 
statute and, as a result, the whole regulatory program could 
be improved in one important way. The OSHAct should be 
amended unambiguously to provide that, in adjudicatory 



129no doubt this admonition should also caution against 
repeating the OSHA experience with the "consensus" standards. 
If a regulatory agency is required to adopt pre-existing 
rules or standards from some other source, private or 
otherwise, there is a special obligation on the part of 
Congress to "instruct" the adopting agency as to how these 
adopted rules or standards should be enforced in their new 
administrative milieus. See , M. Rothstein supra n. . 



336 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

challenges to standards promulgated by the Secretary pursuant 
to his authority under the statute, the review commission 
must accept the Secretary's interpretation of the standard as 
conclusive, unless it clearly can be shown that the 
Secretary's interpretation is arbitrary, capricious, an abuse 
of discretion, or otherwise not in accordance with law. 130 
The same standard should guide a reviewing court in 
discharging its responsibilities under the act. While such 
an amendment may not completely eliminate conflicts between 
the agencies (what could?), it should certainly go far toward 
minimizing them. 131 The arbitrary-and-capricious standard 
is, by no means, a talisman capable of magically transforming 
a confusing regulatory scheme into a more intelligible and 
predictable one. It is, however, a standard with which 
judicial authorities have had long experience and which they 
can be expected more uniformly to apply. It is, after all, a 
court to which the Occupational Safety and Health Review 



130see 5 U.S.C. §706 (2)(A). 



131 In comments to the Administrative Conference on 
this report, OSHRC concedes that certain institutional 
conflicts c^d exist between OSHA and the review commission. 
According to OSHRC, "This occurred in large part because OSHA 
and OSHRC were the first agencies to operate under so 
complete a separation of functions in administering a single 
statute. Further, as the consultant's report indicates, some 
ambiguities in the OSH Act and its legislative history 
regarding the roles of each agency also contributed to the 
conflict." OSHRC maintains, however, that "[a]s a result of 
judicial decisions and its own experience, most of the 
institutional disputes between the Commission and OSHA have 
been resolved. Therefore, the Commission does not believe 
that it is necessary to amend OSH Act to specify more clearly 
the scope of the authority of the respective agencies. 
However, the Commission believes that it would be helpful if 
Congress uses as much specificity as possible in defining the 
roles of the agencies, if the split-function scheme is 
adopted in other areas of the law. Thus, some of the 
uncertainty the Commission faced in its early days would be 
avoided. " 

See , OSHRC "COMMENTS REGARDING THE COMMITTEE ON 
ADJUDICATIONS ' S PROPOSED RECOMMENDATIONS ON THE °SPLIT- 
ENFORCEMENT MODEL FOR AGENCY ADJUDICATION'", pp. 5-6 (August 
20, 1986). 



SPLIT ENFORCEMENT MODEL 337 

Commission compares itself. 132 Such an amendment would give 
specific legislative endorsement to what one can only surmise 
to be the unarticulated assumption on which Congress based 
this bifurcated scheme. 133 The split-enforcement model may 



132interview with Paul A. Tenney, Chief Administrative 
Law Judge, Occupational Safety and Health Review Commission 
(August 28, 1985). 



13 3The OSHAct might be further improved with a second 
amendment. Congress should consider amending section 12 of 
the OSHAct to expand the Commission 's membership to five 
from the current three. See 29 U.S.C. §661 (a) (1982). 

If one but focuses on the work-load of OSHRC in 
comparison to that of the larger MSHRC, one might be 
persuaded, even without more, that OSHRC 's membership should 
be enlarged. 

For example, in fiscal year 1981, OSHRC received 3,739 
notices of contest. Most of these contested decisions were 
disposed of without hearings. Nonetheless, the agency's ALJs 
did render 415 decisions; the Commission itself rendered 215. 
In FY-1982, the corresponding figures were 1,489; 218; and 
168. In FY-1983, they were 1,223; 166; and 102. The FY-1 984 
numbers were 1,307; 159; and 88. The FY-1 984 figures were 
1,435; 164; and 53. (STATISTICS PROVIDED BY OSHRC OFFICE OF 
PUBLIC INFORMATION) 

By contrast, in FY-1 981 , MSHRC AL J ' s received 2,350 
penalty and contested review citations. In that period, the 
Commission itself disposed of 116 cases, a number which 
includes petitions for discretionary review that were 
granted, petitions that were denied, decisions and orders 
terminating cases, as well as cases continued from the 
previous year. In FY 1982, the comparable numbers were 1,450 
and 107. The FY-1983 figures were 1,243 and 67. The figures 
for FY-1 984 were 1,412 and 72. In FY-1 985, the comparable 
figures were 1,490 and 59. (STATISTICS PROVIDED BY FMSHRC 
OFFICE OF GENERAL COUNSEL) 

Of course, the contrary argument might also be advanced-- 
that is, that MSHRC is indeed too large and its membership 
should be decreased. The major problems, however, do appear 
to have existed with the smaller OSHRC and its 
disproportionately heavier caseload. 

Enlarging the review commission to five would allow its 
work to continue with minimal interruption or delay when a 
vacancy occurs. With a three-member commission, one vacancy 
can seriously retard its work; two could virtually paralyze 

it. See, Rothstein, supra n. . 

In addition. Congress might also consider empowering the 
commission to operate in panels of three, with the 



338 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

well have advantages over the traditional, unitary model. It 
may not. It may be that whatever advantages do exist with 
the split-enforcement model are only perceived ones. Whether 
the advantages of the s pi i t -enforcement model be only 
perceived ones or not, it will matter little if Congress does 
not take care to ensure that its intent is more clear, less 
ambiguous. Otherwise, whatever benefits Congress might 
intend, or whatever advantages might be expected from such an 
arrangement could all be lost in confusion and in 
debilitating bureaucratic struggles. 



requirement that the affirmative vote of three members be 
necessary to direct a case for review. The commission could 
still retain the authority to decide important cases en banc. 
Such an arrangement already exists and works well with the 
Mine and Health Review Commission. On an expanded 
commission, members would be appointed for staggering terms 
of five years. A five-member commission would avoid the sort 
of inertia that could hamper the commission's work when a 
vacancy exists. During much of early 1985, OSHRC's work 
came to a virtual halt because it had only one member. By 
August 1985, the Commission was again at its full complement; 
however, two of the three members at that time held recess 
appointments. Such gaps in continuity could be avoided if 
the OSHAct included a hold-over provision for departing 
members. The absence of a hold-over provision is an obvious 
deficiency in the statute. See , 29 U.S.C. §661 (a). 

A larger commission would not so easily be subject to 
frequent shifts in policy. To be sure, under the suggestion, 
a new commissioner would be appointed every year; however, 
the incremental impact of such an appointment would be less 
severe and potentially less jolting than it would be on a 
three-member commission. On a three-member panel the 
replacement of a single member may, at any time, radically 
alter commission policy. Increased confidence also was 
regularly cited by proponents as a principal reason for 
favoring the split-enforcement model. A measure of stability 
in the adjudicatory process and in the development of 
commission precedents is essential to obtaining that desired 
confidence. A five-member commission should help to promote 
that requisite stability. 



BACKGROUND REPORT FOR RECOMMENDATION 86-5 



THE MEDICARE APPEALS SYSTEM FOR COVERAGE AND PAYMENT DISPUTES 



Eleanor D. Kinney, J.D., M.P.H. 

Assistant Professor of Law 

Program for Law, Medicine and the Health Care Industry 

Indiana University School of Law - Indianapolis 

735 West New York Street 

Indianapolis, Indiana 46202 



Report to the Administrative Conference of the United States 
October 1986 



340 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

ACKNOWLKDGMENTS 



Many people have helped with this draft report in a variety of ways. I would 
like to thank Jeffrey S. Lubbers, Research Director of the Administrative 
Conference of the United States, for his guidance and support in this project. I 
would also like to thank numerous indivi(hials who are actively involved with 
Medicare appeals system in various capacities and who have provided invaluable 
information and insights for this study. These individuals include: Ann T. 
Hunsaker, Assistant General Counsel, Department of Health and Human Services; 
Elise D. Smith, General Counsel of the Prospective Payment Assessment Commission; 
Bruce Steinwald, Deputy Director, Prospective Payment Assessment Commission, Paul 
Morton Ganeles, Chairman, Provider Reimbursement Review Board; David Kleinberg, 
Deputy Associate Director, Office of Management and Budget: Robert W. McCann, 
Vice President and Associate General Counsel, American Hospital Association; Jude 
Duffy, Staff Attorney, American Hospital Association, Tom Gilligan, Catholic 
Health Association; Steven Crickmore, Blue Cross and Blue Shield of Indiana; 
Sally Hart Wilson, Staff Attorney, National Senior Citizens Law Center; Michael 
C. Parks, Staff Attorney, National Health Law Program; Leonard C. Homer & Carol 
Hedlund, Ober, Kaler Grimes & Shriver, Baltimore, MD; John B. Reiss, Dechert, 
Price & Rhoads , Philadelphia, PA; Lawrence R. Mullen, Fnlbright & Jaworski , 
Houston, TX; Ronald N. Sutter, Powers, Pyles, Sutter & O'Hare, Washington, DC; 
James E. Kemper, Ice, Miller, Dynadio & Ryan, Indianapolis, IN; Richard E. 
Verville, White, Fine & Verville, Washington, DC and the Office of Senator Dan 
Quaylo of Indiana. 

I would also like to thank my colleague William F. Harvey, Carl M. Gray Professor 
of Advocacy and Professor of Law, Indiana University School of Law -- 
Indianapolis, for his support in this project. I would like to give special 
thanks to my research assistants, Michael D. Wright and Barbara Knotts, for their 
truly excellent help with this project. Finally, I would like to thank the 
typists, Brenda Morrison, Sue Smallwood, Wendy Fisk and Mabel Hart for their 
patient and expert assistance in producing this report and Van Hoi ley for her 
proofreading the final text. 



MEDICARE APPEALS SYSTEM 341 

TABLE OF CONTENTS 



INTRODUCTION 

CHAPTER I: THE MEDICARE PROGRAM 

A. The Structure of the Medicare Program 

1. Administration 

2. Eligibility 

3. Benefits 

4 . Coverage 

5. Financing 

6. Payment Methods 

B. The Medicare Program's Accomplishments 

CHAPTER II: THE COST CRISIS AND 
SEARCH FOR SOLUTIONS 

A. The Crisis 

1. Initial Payment Methodologies 

2 Ramifications of Early Payment 
Methodologies 

B. The Search for Solutions 

1 . Hospital Payment Reform 

2. Physician Payment Reform 

3. The Solution to the Hospital Cost 
Problem: The Prospective Payment System 

C. Ramifications fpr the American Health 
Care System and Medicare Appeals 

CH APTER III: THE MEDICARE APPEALS SYSTEM 

A. Historical Development of 
the Medicare Appeals System 

1. The Original Appeals System 

2. Early Concerns and Problems 



342 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

B. The Present Medicare Appeals System 

1. Beneficiary Appeals Under Part A 

2. Provider Appeals Under Part A 

3. Appeals Under Part B 

4. Waiver of Liability Appeals 

C. Recent Congressional Action 
on Medicare Appeals 

CHAPTER IV: PROGRAM ADMINISTRATION ISSUES 

A. Intermediary and Carrier Coverage 
and Payment Determinations 

1. Use of Unpublished Standards 
and Guidel ines 

2. Restrictive Interpretations 
of Coverage Rules 

3. Information on Coverage Determinations 

B. Setting the Price under 

the Prospective Payment System 

C. Implementation of the PRO Program 
CHAPTER V: ADMINISTRATIVE HEARING ISSUES 

A. Beneficiary Coverage Appeals under Part A 

1. Beneficiary Appeals under 

the Prospective Payment System 

2. Provider Representation of 
Beneficiaries in Appeals under Part A 

3. Deficiencies in Appeal Procedures 
for Claims Under $100 

B. Provider Payment Disputes under Part A 

1. Jurisdiction of the PRRB for 
Hospital Appeals under the 
Prospective Payment System 

2. Retrospective Correction of Errors 
in Prospective Payment Rates 



MEDICARE APPEALS SYSTEM 343 



3. HHS Non-Acquiescence with Judicial 
Decisions 

4. PRRB Role and Procedures 

5. Hospital Waivei' of Liability Appeals 
Hearing Procedures under Part B 



CHAPTER VI: AVAILABILITY OF ADMINISTRATIVE 
AND JUDICIAL REVIEW 

A. Administrative and Judicial Review 

of Part B Coverage and Payment Disputes 

B. Preclusion of Payment Issues for Hospitals 
under the Prospective Payment System 

C. Jurisdictional Bar to Judicial Review 
under the Social Security Act 



CHAPTER VII: RECOMMENDATIONS AND SUGGESTIONS 
FOR FURTHER STUDY 

A. Program Administration Issues 

1. Intermediary and Carrier Coverage 
and Payment Determinations 

2. Setting the Price Under the Prospective 
Payment System 

3. Implementation of the Peer 
Review Program 

B. Administrative Hearing Issues 

1. Beneficiary Appeals Under Part A 

2. Provider Payment Disputes 
Under Part A 

3. Hearing Procedures Under Part B 

C. Availability of Administrative 
and Judicial Review 

1 . Preclusion of Administrative and 
Judicial Review of Part B Claims 



344 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

2. Preclusion of Administrative and 
Judirial Review of Certain Hospital 
Payment Issues 

3. Jurisdictional Bar to Judicial 
Review Under the Social Security Act 

n. Proposal for a Conference nn 
the Medicare Appeals System 

E. Conclusion 



APPENDIXES 

A. T.ist of Diagnosis-Related Groupings (DRGs) 

B. Diagram of Appeals Processes for Coverage and Payment Disputes 
Under Part A and Part B 

C. Miscellaneous Exhibits 

1. Explanation of Medicare Benefits Form. 

2. Health Care Financing Administration, Your Right to Appeal 
Decisions on Hospital Insurance Claims (July 1984). 

3. Notice to Beneficiaries Regarding Hospital Benefits under the 
Prospective Payment System. 

4. Table: Provider Reimbursement Review Board, Performance 
Stati.stif:s for the Periods Ending 6-30-75 Through 6-30-86 



MEDICARE APPEALS SYSTEM 345 

INTRODUCTION 

Beneficiaries of the Medicare program and the health care professionals and 
institutions that serve these beneficiaries have seriously questioned the 
adequacy of the Medicare appeals system for disputes over the coverage of and 
payment for Medicare benefits. Two major developments have precipitated this 
inquiry. First, the prospective payment system for hospitals, adopted in 1983, 
has wrought monumental changes throughout the Medicare program. Specifically, 
implementation of the prospective payment system has resulted in increased 
utilization of outpatient services by Medicare beneficiaries and, consequently, 
in addition to changes in appeals of hospital payment issues, the number and 
complexity of appeals regarding all types of Medicare benefits has increased. 

The second factor is the long term, continuing and profound dissatisfaction 
with certain aspects of the Medicare appeals system among beneficiaries and 
providers. In the last five years, the Supreme Court and other federal courts 
have made many important decisions in cases challenging the Medicare appeals 
system for coverage and payment disputes. Many of these decisions have raised 
basic questions about the fundamental fairness of the Medicare appeals system for 
both beneficiaries and providers. 

As a result of these and other developments, beneficiary and provider groups 
and also Congress have become more concerned about problems with Medicare appeals 
and Interested in considering reforms. Indeed, in its report on the Consolidated 
Omnibus Budget Reconciliation Act of 1985, the House Ways and Means Committee 
acknowledged the need for a thorough review of the Medicare appeals system: 

It has been thirteen years since this Committee has looked 
substantively at medicare's [sic] appeals procedure. Since 
that time the medicare program has undergone major changes. 
Inpatient hospital services that were reimbursed on a cost 
basis are now mostly subject to the p'^ospective payment 
system. An increasing amount of services once provided only 
on an inpatient basis are now being provided in ambulatory 
settings. As a result of these current changes, the 
Committee believes that the current hearing and appeal 
procedure under medicare needs to be reviewed.^ 

In its budget bill for FY 1987, the House Budget Committee has proposed reforms 
of the Medicare Appeals System in some areas. ^ 

This study of the Medicare appeals system analyzes those processes available 
for beneficiaries and hospitals to appeal coverage and payment determinations 
under Part A and Part B of the Medicare program. The analysis reflects comments, 
concerns and observations of government officials, congressional staff and 
interest group representatives and their counsel who are closely involved with 
the Medicare program and its appeals system. 



^H.R. Rep. No. 241, Part I, 99th Cong., 1st Sess. 45-46 (1985). 



9. 



-H.R. 5300, 99th Cong.. 2d Sess. (1986). See H.R. Rep. 727, 99th Cong., 2d 
Sess. 95-96, 158-59 (1986). See notes 351-355 infra and accompanying text. 



346 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

The first chapter explains the Medicare program and touches briefly on some 
of the program's monumental accomplishments. The second chapter describes the 
threatening problem of escalating costs of providing services to benef iciaries-- 
a problem that It is fair to say has had a dispositive influence on the policies 
and conduct of the Department of Health and Human Services and the Health Care 
Financing Administration in administering the Medicare program. The third 
chapter outlines the appeals procedures for payment and coverage disputes under 
Part A and Part B of the Medicare program. The next three chapters recount 
reported problems and concerns about the Medicare program and its appeals process 
in three areas: (1) program administration, (2) administrative hearing, and (3) 
the availability of administrative and judicial review. 

Chapter VII contains some preliminary recommendations for changes in the 
Medicare appeals system. However, for some issues, it is necessary to obtain 
additional empirical information to understand their full dimensions. 
Consequently, for these issues. Chapter VII makes suggestions for further study 
with a view toward making recommendations in the future. In proposing 
recommendations and making suggestions for further study, this analysis is 
acutely aware that the Medicare program operates under unprecedented budgetary 
pressures and that curtailment of the administrative expenses associated with the 
Medicare program is in the best interest of this nation as well as. ultimately, 
beneficiaries and providers of the Medicare program. 



MEDICARE APPEALS SYSTEM 347 

CHAPT ER I : THE _MED I CARE PR O GRAM 

In 1965, Congress established the Medicare program to provide health 
insurance for the aged.-^ At this time, the problem of access to quality health 
care services for the aged was especially severe. In 1963, only 56% of the aged 
had health insurance and yet had a greater risk of illness and far lower income 
than other population groups.^ As President Lyndon B. Johnson stated when he 
signed the Social Security Amendments of 1965, the hope was that Medicare would 
remove financial barriers to quality health care services for the elderly: 

No longer will older Americans be denied the healing powers 
of modern medicine. No longer will illness crush and destroy 
the savings that they have so carefully put away over a life 
time so that they might enjoy dignity in later years. '^ 

Enactment of the Medicare program was truly an extraordinary event. There 
was formidable ideological opposition particularly from the medical profession 
that feared government control of medical practice.'^ The hospital industry was 
somewhat more receptive to the concept since the program would assure predictable 
payment for hospital services in an unprecedented manner.^ Nevertheless, the 
passage of the Medicare program, and also the Medicaid program, faced 
considerable obstacles and was probably possible only because of the 1964 



^Social Security Amendments of 1965, Pub. L. No. 89-97, Title I, §§ 101-111. 
79 Stat. 291 (1965) [hereinafter cited as " Social Security Amendments of 1965 "], 
codified as amended i n. Social Security Act, Title XVIII. 42 U.S.C. § 1395 et 
seq. (1982 ed. . Supp. II) . 

At the same time Congress enacted the Medicaid program providing health 
insurance for some poor. Social Security Amendments of 1965. Title I. § 121-122. 
codified as amended in , Social Security Act. Title XIX, 42 U.S.C. § 1396 et seq . 
(1982 ed. . Supp. II) . 

^Gornik, Greenberg. Eggers & Dobson, Twenty Years of Medicare and Medicaid: 
Covered Populations, Use of Benefits, and Program Expenditures , Health Care Fin. 
Rev. 13, 14 (1985 Annual Supp.), [hereinafter cited as " Twenty Years of Medicare 
and Medicaid" ] . 

^Remarks at the Signing of the Medicare Bill, July 30, 1965, Public Papers 
of the Presidents - Lyndon B. Johnson, 1965 , Vol. II, 811, 813. 

■^See J. Feder , Medicare: The Politics of Federal Hospital Insurance (1977); 
T. Marmor. The Politics of Medicare (1973); R. Myers, Medicare (1970); Cohen, 
Reflections on the Enactment of Medicare and Medicaid , Health Care Fin. Rev. 3 
(1985 Annual Supp. ) . 

^ See A. Somers & H. Somers, Medicare and the Hospitals (1967). 



348 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

landslide victory of Democratic President Lyndon B Johnson and his subsequent 
skillful management of the legislation In Congress along with the support of key 
congressmen. 

The political circumstances of the pnssage of the Medicare program, and also 
the Medicaid program, explain their design. The initial House bill provided only 
for hospital insurance for the aged: supplementary medical Insurance to cover 
physicians' services was added in an effort to broaden support for the bill among 
Republican congressmen. What finally emerged in the Social Security Amendments 
of 1965 were three distinct programs: the Medicare Hospital Insurance Program 
("Part A"), the Medicare Supplementary Medical Insurance Program (Part B") and 
the Medicaid Program. Each of these programs has different benefits. Is 
financed and administered independently and pays for services according to 
different methodologies. 

A . The Str uc ture of the Medicare Progr am 

The Medicare program is fundamentally different from most other federal 
entitlement programs as it does not provide cash benefits directly to its 
beneficiaries. Rather, the program relies on hospitals, other health care 
Institutions and physicians to provide benefits to its beneficiaries. The 
Medicare program even leaves the determination of the amount of covered benefits 
that should be provided to beneficiaries in specific cases to physicians and 
health care institutions. This arrangement is consistent with the tradition in 
the American health care system that the determination of what medical treatment 
should be accorded in a particular case is primarily the province of the medical 
profession.^ Under state medical licensure laws^^ as well as the prevailing 



"Cohen, supr a note 6. 

'See J. Feder, supra note 6: T. Marmor. supra note 6: Cohen, supra note 
6. The Medicaid program evolved from a proposal of the American Medical 
Association that sought to build on existing Medical Assistance programs for the 
poor . 

"Medicaid is a joint federal -state program providing hospital, physician and 
extensive nursing home services for persons on the Aid to Family with Dependent 
Children and Supplemental Security Income programs and, if the state elects, for 
persons who. but for Income, meet the eligibility criteria for these categorical 
assistance programs. Social Security Act § 1902(a)(10). 42 U.S.C. § 1396a(a)(10) 
(1982 ed . , Supp. II). Medicaid is financed out of federal revenues from general 
appropriations which match state expenditures for the Medicaid program. State 
programs must meet certain federal requirements to qualify for these federal 
matching funds. Social Security Act §§ 1901 and 1902(a), 42 U.S.C. §§ 1396 and 
1396(a) (1982 ed . , Supp. II). This study does not address appeals under the 
Medicaid program which are handled primarily by the states. 

^Medicare has acknowledged this basic characteristic of the American health 
care system in its requirement that a physician -- defined broadly under the 
statute to Include osteopathic physicians, optometrists, podiatrists, dentists 



MEDICARE APPEALS SYSTEM 349 

accreditation standards for hospitals.'' onJy physicians, with their special iz(!d 
knowledge and judgment accjuired through years of medical education and training, 
can treat all types of human disease, admit palionts to hospitals and, once in 
the hospital, determine the hospital resources used for their care.^^ 

Medicare is an enormous program, serving over 30 million individuals, ' and 
is the largest federal entitlement program next to the Social vSecurity income 



and chiropractors practicing within the scope of their license (Social Security 
Act § 1861(r), 42 U.S.C. § 139vSx(r) (1982 ed . , Supp . II)) - certify that 
services provided to Medicare beneficiaries are reasonable and necessary for the 
treatment of illness. Social Security Act §§ 1814(a) and 1835(a), 42 U.S.C. §§ 
1395K(a) and 1395(a) (1982 ed . , Supp. II). 

^^See Am(;rican Hospital Association, An Ana lysis i^f the; ReyisjHl Mj>di^ 
Staff _S tanfliU'ds^. of the Joint Commission on the A ccreditat ion of Hospitals ( March 
1984 ) . 

^^i'<-J-jL. JIjIL-' .Joint Commission for the Accreditation of Hospitals, 
Accreditation Manual for Ho spitals ( 1984 ) . 

The JCAII is a private accrediting body whose members are select(Hl, for the 
most part, by the hospital industry and medical profession. A hospital that is 
accredit(!d by the JCAH will be deemejd to be in compliance with Medicare's 
conditions of participation for hospitals and eligible to provide hospital 
services to Medicare beneficiaries. Social Security Act § 1865, 42 U.S.C. § 
1395bb (1982 ed . . Supp. II); 51 Fed. Reg. 22.010 (June 17, 1986). Se e genera lly 
Jost , Th e Joint Commission on Acc rtnUtation of Hospi tals : Priyate Refill ajtlons^f 
Health Care in the Public Interest. 24 B.C.L. Rev. 835 (1983). 

^^In 1984, the JCAH loosened the medical staff standards which delineated 
what health care professionals can serve on the medical staff of a hospital and 
have privil(?ges to aclmit and treat patients in a hospital by authorizing medical 
staff membership and admitting privileges for some non physician health care 
professionals within the scope of their license but with appropriate sn[)ervision 

by physicians . See J.oijit Comm ission for the Accreditation of Hospitals, 

Accreflitat ion Manual for Hospitals, at 89 95 . See American Hospital Association, 

An Atialysis of the Revised Medical Staff Standards of the Joint Commission on 

Accreditation of H()spitals, sujjra note 12. 

^^I-evits, Laz(!nby. Waldo & Davidoff, NaAilUI^J-J'f-yAllL Jl^A-J^iUlilLll^! ._i^A4' 
Health Care Kin. Rev., Fall 1985. at 23 [hereafter cited as "Nation al H ealth 
Fxpendi tu res . 1984"] . 



350 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

■aintenance program for the aB«»d and disabled. '* II cnnprised an estimated 7% of 
the federal budKet for FY 1986.^^'* Over 70* of Medicare expenditures in 1984 were 
for hospital services under I'art A and 23* were for physician and other 
outpatient services under Part n. Medicare is the largest single payer for 
hospital services in the nation and. in 1984. paid 28* of the nation's total bill 
Tor hospital care.^'' Approximately 36* of the revenue of the v*) , 800 community 
iiospitals seiving Medicare beneficiaries comes from the Medicare program 
i-esulting in hospitals' heavy reliance on this program for financial stability. ^^ 
Medicare is also the largest purchaser of physician and other outpatient services 
and, in 1984. paid approximately 25* of the nation's bill for these services. ^^ 

1 . Administ ratior t 

The Health Care Financing Administration (MCFA) within the Department of 

Health and Human Services (HHS) administers the Medicare program. Before 1980. 

HHS was the Department of Health. Education and Welfare (HEW). Initially, the 

Social Security Administration (SSA) administered the Medicare program. In 1977. 

the Carter administration created HCFA and consolidated the Medicare and Medicaid 

on 
programs into this agency. 

HCFA contracts with private organizations to administer the claims of 

benef i«;iaries and the payment of providers under the Medicare program. ^^ For 

Part A, those organizations are called "fiscal intermediaries" and for Part B 

th(?y are referred to as "carriers." Despite the name difference, these 



''^Execnt ive Office of the President, Office of Management and Budget. Budget 
of the Uni ted States, FY 1987 (1986) [hereinafter cited as " Budget of the United 
St a t_e s ^ FY 1987 " ] . 

'^Jd. at M-4 Sc 5-109. This figure was derived by dividing estimated 
Medicare budget outlays for FY 1986 by total federal budget outlays for FY 1986. 

^ ^National Health Exp end itures, 198 4 at 23. 

^'^U\. at 20; Budget of the Unit ed States. FY 1987 at 5-108. 

^^J . Schwartz and J. Martin. Hos pitaJ Involvemen t With Medicare and 
Me dicaid: A Statistical Profile 1 (1983) (American Hospital Association. Office 
of Public Policy Analysis). 

^^B udget of the United St ates, FY 1 987 at 5-108. 

2O42 Fed. Heg. 13.262 (1977). 

2'social Security Act §§ 1816 and 1842, 42 U.S.C. §§ 1395h and u (1982 ed. . 
Supp. II). 



MEDICARE APPEALS SYSTEM 351 

organizations perform essentially tlu? same functions of administering claims for 
coverage ami payment. Congress adopted this unique approach for program 
administration hecaiise lU ue Cross and Mine Shieid plans and other insurance 
companies had the requisite expertise for administering complex health insurance 
prc)grams and also becaiisc? of pressures from the; hospital industry for an 
arrangement which allowed hospitals to deal with familar Blue Cross plans and 
insurance companies ra1h(?r than the federal government. '^ 

The administration of the Medicare program is a mammoth job and includes 
(Jet erm i ni ng the coverage? and amount of payment for millions of claims of 
benef i<:iar ies . In FY 1987, HCFA estimates that the Medicare program will process 
36() million claims an incr(?as(! of :{3"i over FY 1986i.^^ HUS has requested $957 
million for the administration of the Medicare program in its FY 1987 budget 
request of which $728 miJlion is for essential claims processing s(?rvices . ^"^ The 
determination of coverage and the payment for each claim is performed by the 
personnel of fiscaJ intermediaries, cairiers and now also peer review 
organizations (PROs).^'* Congr(!SS delegated extraordinary adjudicative powers to 
these private organizations with respect to resolving appeals over coverage and 
payment issues arising under Part A and Part B of the Medicare program. 

To provide the requisite guidance to fiscal intermediaries, carriers and 
PROS as well as to hospitals and other institutional providers, HCFA uses a 
massive compendium of multi -volume health insurance manuals for each of the 
organizations and providers involved in the administration and provision of 
health care benefits to Medicare beneficiaries.'^^' In addition. HCFA publishes a 



^^see S. Law, HlmLJir^'s? : .W^Jlk WJU't J^ilP.Oll'^ 31 50 (2d. ed . 1976). H.R. 
Rep. No. 213, 89th Cong., 1st Sess . . 45 47 (1965); S. Rep. No. 404. 89th Cong.. 
1st Sess. , 52 54 (1965) . 

^^Depaitment of Health and Human Services, HHS Fiscal Ye ar 1987 Budge t 
RiL'L'L'l«i (Ffib. 5. 1986) [hereinafter cited as "HHS Fisc al Year 1987 Budge t 
Request"] . 



24 



Id. 



''Peer Revi(;w Organizations are physician dominated organizations 
responsible for determining whether certain benefits provided to Medicare 
beneficiaries are medically necessary and provided in an appropriate setting. 
See notes 120 130 infra and accompanying text. 

^^Thes(? health insurance manuals inc-lude the following: Group F'ractice 
Prepayment Plan Manual (HIM-8); Hospital Manual (HIM-10); Home Health Agency 
Manual (HIM- 11); Skilled Nursing Facility Manual (HlM-12); Medicare 
fntermediar ies Manual (HIM-13); Medicare Carriers Manual (HIM-14); Provider 
Reimbursement Manual (HIM 15); Medicare Renal Dialysis Facility Manual (HIM 29); 
and PRO Manual. HCFA constantly updates these manuals through "transmittals." 
For directiv(?s without ongoing effect, HCFA us(»s program memoranda. The Program 
Memoranda series went into effect March 1985 and include: Program Memoranda: 



352 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

special mamial lisfinK what technologies, procedures and services HHS includes as 
covered bebefits under the Medicare proKram . These manuals and other program 
directives are i nteipretat ive and not promulgated pursuant to the Informal 
rulemaking requirements of the Administrative Procedure Act . ° As of September 
1981. HCFA publishes rulings not previously published in the Federal Register to 
clarify points of statutory and regulatory interpretation over which questions 
arise. ^^ HCFA has not issued rulings often. Indeed. HCFA has issued only about 
twelve rulings since 1981. 

2. K I iHi h 1 1 J tj? 

All individuals who are eligible for Social Security old age and dlsabilltv 
insurance programs are eligible for Part A and Part B of the Medicare program. ^^ 
Hligibility for these programs is also extended to nearly all other elderly not 
covered by the Social Security program^' and certain other Individuals with End 



Intermediaries; Program Memoranda: Carriers; Program Memoranda: 
Intermediaries/Carriers. These series replace the former series of program 
directives called Int<?rmediary Letters. 1 Med icare & Medicaid Guide (CCH ). at 
523. There is also a comparable series for Peer Review Organizations. 

HCFA gives each fiscal intermediary and carrier copies of these health 
insurance manuals and distributes manuals to providers and other organizations as 
needed for their work. However, HCFA does not make these manuals generally 
available to the public or even to providers because of their size, cost and need 
to be updated constantly. 42 C.F.H § 401.112 (1986). Portions of these manuals 
that affect the public are distributed to local Social Security Administration 
offices (2d. at § 401 . 130- . 132) , although beneficiary advocacy groups maintain 
that such distribution does not always occur in practice. 

27 

Health Care Financing Administration, Medicare Coverage Issues Manual 

HCFA-Pub. 6 r eprinted in , 4 Medicare & Medicaid Guide (CCH) , 1 27.201-27,221. 



28 



29 



5 U.S.C. § 553 (1982 ed., Supp. II) 



42 C.F.K. § 401 . 108 (1986) . 

^^Social Security Act §§ 1811 and 1836, 42 U.S.C. § 1395c and o (1982 ed 
Supp 11). 

^^Social Secuirty Act §§ 1818 and 1836, 42 U.S.C. § 13951-2 and o (1982 ed. 
Supp. II). 



MEDICARE APPEALS SYSTEM 



353 



^^ Enrollment in both Part A and Part B of the Medicare 
^^ There is no cost to enroll in Part A;^'* however, to 



Stage Renal Disease 

program is voluntary. 

enroll in Part B, the eligible individual must pay monthly premiums 

of all eligible individuals enroll in Part B, 



35 



About 97% 



36 



3. Benefits 

Part A . The benefits under the hospital insurance component, Part A, 
include 90 days of basic hospitalization for each spell of illness. ' There is 
no limit on the number of covered hospital admissions so long as there is only 
one admission in a single benefit period -- the time from admission until 60 days 



after discharge 



38 



Part A also covers 100 days in a skilled nursing facility 



32 



Social Security Act § 1811, 42 U.S.C. § 1395c (1982 ed . , Supp II). 



33 



Social Security Act § 1803, 42 U.S.C. § 1395b (1982 ed., Supp. II) 



34 



Social Security Act § 1811, 42 U.S.C. § 1395c (1982 ed. , Supp. II) 



ed 



^^Social Security Act § 1839 and 1840, 42 U.S.C. 
Supp. II). 



§§ 13395r and 1395s (1982 



State Medicaid programs may pay Part B premiums for the elderly who also 
receive Medicaid benefits. An estimated 85% of the Medicaid aged have Part B 
insurance purchased by state Medicaid programs. Twe nty Years of Medicare a nd 
Medicaid at 29. Social Security Act § 1843; 42 U.S.C. § 1395v (1982 ed . , Supp. 
II). Social Security Act §§ 1839 and 1840, 42 U.S.C. §§ 1395r and s (1982 ed. , 
Supp. II). 



^ ^Twenty Years of Medicare and Medicaid at 14. 



^''social Security Act § 1812, 42 U.S.C. 
C.F.R. § 409.10. 27 and .60-69 (1986). 



§ 1395d (1982 ed . , Supp II); 42 



^^In any benefit period, a beneficiary is entitled to 60 fully paid days of 
hospital care, subject only the initial deductible amount. After 60 days, a 
beneficiary must pay a per diem coinsurance amount equal to one-fourth of the 
Initial deductible. After 90 days, the per diem coinsurance amount doubles that 
of the amount for days 61 through 90. In addition, each day of hospital care in 
excess of 90 is subtracted from the beneficiary's 60 days of "lifetime reserve" 
which he may use only once. Social Security Act § 1813(a); 42 U.S.C. § 1395e(a) 
(1982 ed. , Supp. II) . 

Covered benefits under Part A include nearly all services, except for 
luxuries, generally provided in a hospital stay, namely room and board In a semi- 
private room, nursing services, operating and recovery room costs, drugs and 



354 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

following a hospl tal i /at ion , "^^ unlimited home health agency visits if the 
beneficiary is confined to home, and limited hospice services for the 
terminally 111.^^ For the hospital benefit, there Is a a deductible amounting 
to the cost of the first day of the hospitalization and some coinsurance after 
the 60th day of a hospital stav. There is also coinsurance for skilled nursing 
but not home health services. '^ 

Part B . The benefits under the supplementary medical insurance component, 
Part B, include physicians' services and a wide variety of other medical services 
provided on an outpatient basis.'*'* These include services provided in hospital 
outpatient departments and rural health clinics, outpatient surgery, diagnostic 
x-ray and laboratory services, rehabilitative services, physical, occupational 
and speech therapy and services of physicians' assistants and nurse practitioners 
ordered by a physician. Part B also offers some home health services not covered 



medical supplies furnished in the hospital, laboratory tests, radiological 
services billed by the hospital, rehabilitation services, and blood. Social 
Security Act § 1861(b), 42 U.S.C. § 1395x(b) (1982 ed., Supp. 11). 

^^Social Security Act § 1812(a)(2)(A), 42 U.S.C. § 1395d(a ) (2 ) (A) (1982 ed., 
Supp. II); 42 C.F.R. § 409. 30-. 36 (1986). 

'^^Social Security Act § 1861(m), 42 U.S.C. § 1395x(m) (1982 ed.. Supp. II). 

Home health services include: part-time or intermittent nursing care 
provided by or under the supervision of a registered professional nurse; 
physical, occupational, or speech therapy; some medical supplies and durable 
medical equipment; and other items and services. To be eligible for home health 
services, the beneficiary must be "confined to home" and "in need of intermittent 
skilled nursing care." 42 C.F.R. § 409.42 (1986). 

^^Social Security Act § 1812(d). 42 U.S.C. § 1395d(d) (1982 ed. . Supp. II). 

'^^soclal Security Act § 1813. 42 U.S.C. § 1395e (1982 ed . . Supp. II). See 
note 40 supra . 

"^^Social Security Act § 1813(a)(3), 42 U.S.C. § 1395e(a)(3) (1982 ed. , Supp. 
II). 

'*'*SociaI Security Act § 1832, 42 U.S.C. § 1395k (1982 ed . . Supp. II): 42 
C.F.R. § 405.231 (1986) . 






MEDICARE APPEALS SYSTEM 



355 



under Part A."*^ Finally, an increasingly important and costly Part B benefit is 
the lease or purchase of durable medical equipment. There is no limitation on 



the number of services provided under Part B. 



47 



Enrol lees pay an annual 



deductible of $75.00 and pay 20% coinsurance on most covered services incurred 
during the year."*^ 

It should be emphasized that physicians and suppliers of durable medical 
equipment under Part B are not required to accept Medicare payment as payment in 
full for their services.'*^ Rather, they can bill Medicare patients directly for 
any amount they wish to charge and patients must then submit claims to the 
Medicare program for payment. A physician or supplier may accept assignment of a 
beneficiary's benefits but upon doing so relinquishes the right to bill the 
beneficiary for the difference between Medicare's payment and the full charge for 



the services. 



50 



As will be discussed below, physicians and suppliers, until 



recently, have had little incentive to accept assignment ."^-^ In 1985, because of 



Although the home health services covered by Part A and Part B are 
identical, there is a slight difference between the two programs concerning the 
definition of "home health agency." Under Part B, but not Part A, the term 
includes any agency or organization which is primarily for the care and treatment 
of mental diseases. Social Security Act § 1861(o), 42 U.S.C. § 1395x(o) (1982 
ed. , Supp. II) . 

^^Social Security Act § 1832, 42 U.S.C. § 1395k (1982 ed., Supp II); 42 
C.F.R. § 405.231 (1986). 

4'^Social Security Act § 1862(a)(1)(A), 42 U.S.C. 1395y(a) (1) (A) (1982 ed. , 
Supp. II). 

^^Social Security Act § 1833(a), (b), 42 U.S.C. § 13952(a) , (b) (1982 ed. , 
Supp. II). 

"^^Social Security Act § 1842(b) (3) (B) (1) , U.S.C. § 1395u(b) (3) (B) (1 ) (1982 
ed. , Supp. II). See Staff of Special Senate Comm. on Aging, Medicare: Paying the 
Physician — History, Issues, and Options , 98th Cong., 2d Sess. 3 (1984) (Comm. 
Print) [hereinafter cited as " Medicare: Paying the Physician "]. 

5°Social Security Act § 1842(b) (3) (B) (ii ) , 42 U.S.C. § 1395u(b) (3) (B) (ii ) 
(1982 ed. , Supp. II) . 



51 



See notes 142-145 infra and accompanying text. 



356 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

payment reforms enacted by Congress, ^ approximately 68.1% of physicians accepted 
assignment which was a marked Increase over past years. 

4 . Coverage 

An important concept In Jinderstanding Medicare benefits, and particularly 
the disputes over benefits that arise between beneficiaries, providers and the 
Medicare program, is coverage. In brief, coverage defines the type and amount of 
health care benefits that the Medicare program will pay for as well as the 
conditions that must be met for payment. HCFA. in consultation with a panel of 
HCFA physicians or the Public Health Service, and also. In some more minor cases, 
fiscal intermediaries and carriers, determines what new procedures and 
technologies will be covered Medicare benefits when the question arises.^** 

The Social Security Act also specifies certain types of services that are 
expressly excluded from coverage under the Medicare program.^ For both F'art A 
and Part B. such services include physicals, immunizations, eye glasses and 
hearing aids, personal comfort items and cosmetic surgery. ^^ The two conditions 
for coverage are that services not be covered by another public insurance 



^^See notes 142 & 146 infr a and accompanying text. 

^''Jencks & Dobson, S trategies for Reforming Medicare's Physician Payments- 
Physician Diagnosis-Related Groups and Other Approaches , 312 New Eng. J. of Med. 
1492 (1985). 

^'*See Banta. Ruby & Burns, Usi ng Coverage Policy to Contain Medicare Costs 
and Rating , The Medicare Technology in House Coram . on Ways and Means. Proceedings 
of the Conference on the Future of Medicare , 98th Cong., 2d Sess. 129-148 (1984) 
(Coram. Print ) . 

^'^^''Social Security Act § 1862, 42 U.S.C. § 1395y (1982 ed., Supp. II); 42 
C.F.R. § 403.310 - .323 (1986). See Medicare Beneficiary Appeals Processes in 
Prospective Payment Assessment Commission. Technical Appendixes to the Report and 
Recommendations to the Secretary, I'.S. Department of Health and Human Services, 
A pri l 1, 1986. Appendix C, at 162, 165-66 [hereinafter cited as " Technical 
Appendixes to the ProPAC Report and Recommendations to the Secretary, April 1, 1986 " J . 

^^Social Security Act § 1862, 42 U.S.C. § 1395y (1982 ed . , Supp. II); 42 
C.F.R. § 405.310 -.323 (1986). 



MEDICARE APPEALS SYSTEM 357 

en 

program"^' and that the services must be "reasonabJe and necessary" for th» 
treatment of an Illness. ^ 

It is the condition that the services be reasonable and necessary for the 
treatment of an illness that generates most of the disputes over coverage and the 
bulk of appeals on coverage determinations under both Part A and Part B.^^ The 
determinations require a decision on the basis of medical criteria of whether 
the benefit was necessary and reasonable in a specific instance or provided in an 
appropriate setting. For hospital services under Part A, PROs make this 
determination."^ Fiscal intermediaries make this determination for skilled 
nursing and home health services under Part A, and carriers make this 
determination for Part B services."^ For Part A, another important condition for 
coverage of hospital and skilled nursing services is that the care not be 
"custodial.""^ Because of the inherent uncertainty of these types of coverage 
decisions. Congress has authorized the Secretary of HHS to waive a beneficiary's 
or provider's liability for any services not covered on the basis of medical 
criteria if the beneficiary or provider did not know or have reason to know that 
such services were not covered. ""^ 

5. Financing 

Part A of the Medicare program is financed by the Hospital Insurance Trust 
Fund which is funded from the mandatory Social Security payroll tax on all wage 



^"^Social Security Act § 1862(a)(2) and (3), 42 U.S.C. § 1395y(a)(2) and (3) 
(1982 ed., Supp. II); 42 C.F.R. § 405. 322-. 325 (1986). 

^%ocial Security Act § 1862(a)(1), 42 U.S.C. § 1395y(a)(l) (1982 ed. , Supp. 
II); 42 C.F.R. § 405.310 (1986). 

^^Social Security Act § 1862(a)(1), 42 U.S.C. § 1395y(a)(l) (1982 ed. , Supp. 
II). Medicare Beneficiary Appeals Provisions in Technical Appendixes to the 
ProPAC Report and Recommendations to the Secretary, April 1, 1986 , Appendix C, at 
165-66. 

^^See notes 237-239 infra and accompanying text. 

^^See notes 235 & 303 infra and accompanying text. 

^^social Security Act § 1862(a)(9). 42 U.S.C. § 1395y(a)(9) (1982 ed. , Supp. 
II); Medicare Beneficiary Appeals Processes in Technical Appendixes to the ProPAC 
Report and Recommendations to the Secretary, April 1, 1986 , Appendix C, at 165. 

^^social Security Act § 1879, 42 U.S.C, § 1395pp (1982 ed. , Supp. II). See 
notes 227-231, 323 infra and accompanying text. 



358 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

earners/'^ Part D is financed hy the Supplementary Medicare Insurance Trust Fund 
which is funded from premiums of enrol lees and congressional appropriations.^^ 
Preaiuns comprise only about 25* of the Part B trust fund; the remaining 75% 
cones from appropriations. 

6. Payment Methods 

It is important to appreciate that Congr«?8s initially gave hospitals and 
physicians almost complete autonomy to structure the method and level of payment 
under the Medicare and Medicaid programs. Former HEW Secretary Wilbur Cohen, a 
chief architect of the Medicare program, observed: "The ideological and 
political issues were so dominating that they precluded consideration of issues 
such as reimbursement alternatives and efficiency options.""' Indeed, the only 
constraints the Social Security Amendments of 1965 imposed on hospitals and 
physicians in setting their payment levels under the Medicare program was that 
the level be "reasonable" and the services provided be "necessary" for the 
treatment of illness."" However, Congress and federal policy makers have been 
gravely concerned about payment methodologies under the Medicare program since 
its inception for reasons discussed in Chapter II and have instituted major 
reforms in the payment methodologies for acute care hospitals under Part A and 
are now developing major reforms in the payment methodologies for services under 
Part B. 

B . T he Medicare Prog r am's Accomplishments 

The Medicare program's accompl ishmenLs have been substantial and this 
entitlement program, although costly, has clearly been a success. Between 1967 
and 1983, there was an increase in the utilization of hospital, home health and 

fiQ 

physicians' services by Medicare beneficiaries." Medicare has had a remarkable 
Impact on improving the health status of the elderly as evidenced by a two and 
one-half year increase In life expectancy among the aged since 1965 and drops of 



^"•social Security Act § 1817, 42 U.S.C. § 13951 (1982 ed., Supp. II). 

^^Social Secuirty Act § 1841. 42 U.S.C. § 1395t (1982 ed . Supp. II). 

^^ National Health Expenditures 1984 at 23, Table 9. 

"'Cohen, supra note 6 at 5. 

^^Social Security Act §§ 1815, 1833 and 1862(a)(1). 42 U.S.C. §§ 1395g, 1 
and y(a)(l) (1982 ed.. Supp. II). 

^ %wenty Years of Medicare and Medicaid at 35-41. 



MEDICARE APPEALS SYSTEM 359 

30% or more in the age adjusted death rates for diseases such as heart disease, 
stroke, diabetes and pneumonia that afflict the elderly. ^^ 

However, the performance of the Medicare program has been seriously 
deficient with respect to its cost, the dimensions of which will be discussed 
further below. But one particularly unfortunate aspect of this cost problem is 
its impact on beneficiaries. Because of deductibles and co-insurance for both 
Part A and Part B and the fact that physicians who do not accept assignment can 
bill patients directly for the difference between Medicare's payment and their 
full charge. Medicare beneficiaries are now responsible for 44% of their medical 
expenses and devote nearly the same proportion of their income to medical care as 
before the Medicare program. '^ 

But perhaps the most serious ramification over the long term is the 
threatened financial solvency of both Part A and Part B of the Medicare program. 
Evidence suggests that if the Medicare program continues to provide benefits at 
its current levels and payment rates, the system may well be insolvent by the end 
of the century.'^ The specter of insolvency is real and must be kept in mind 
when evaluating the performance of HHS, HCFA and its fiscal intermediaries and 
carriers in administering the Medicare program and handling beneficiary and 
provider appeals. 



'^^ What Medicaid and Medicare did - and Did Not - Achieve , Hospitals, Aug. 1, 
1985, at 41-42 (interview with Karen Davis, Ph.D.). 

"^^Aiken & Bays, Special Report: The Medicare Debate - Round One , 311 New 
Eng. J. of Med. 1190 (1981). See also House Select Comm. on Aging, Medicare 
After 15 Years: Has It Become a Broken Promise to the Elderly ?, 96th Cong., 2d 
Sess. (1980) (Comm. print). 

On June 10, 1986, the House Ways and Means Committee held hearings on the 
problem of beneficiaries' costs associated with Part B physician services at 
which measures to correct this serious problem were proposed. See Out-of-Pocket 
Costs for Physician Services: Hearing Before the Subcomm. on Health of the House 
Comm. on Ways and Means 99th Cong., 2d Sess. (1986). 

^^ See Ginsberg & Moon, An Introduction to the Medicare Financing Problem in 
House Comm. on Ways and Means, Proceedings of the Conference on the Future of 
Medicare , 98th Cong., 2d Sess. 1 (1984) (Comm. Print). See also Svahn & Ross, 
Social Security Amendments of 1983: Legislative History and Summary of 
Provisions , Social Security Bull., July 1983, at 3 Mussey, Actuarial Status of 
the HI and SMI Trust Funds , Social Security Bull., June 1985, at 32. 



360 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

CHAP T ER I 1 : THE C OST C Rf SIS AND SEARCH FO R SOLUTI ONS 

A. The _Crisls 

Congress and HEW recognized almost immediately that the costs of the 
Medicare program would greatly exceed Initial projections. These predictions 
proved correct and. over the following years, total Medicare expenditures rose 
from $4.6 billion in 1967 to $62.9 billion in 1985. '''' During this period. Part A 
expenditures rose from $3.1 billion to $43.3 billion and Part B expenditures rose 

7 ^ 

from $1.2 billion to $19.7 billion. The most serious problem, because of its 
relative size and severe inflation rate, was escalating hospital costs. As noted 
above, expenditures for hospital services constitute about 70% of all Medicare 
expenditures' ' and, between 1967 and 1983, rose at an annual compound rate of 
17.2%.'' During this period, physician services, the second largest component of 
Medicare expenditures, constituting 23% of Medicare expenditures,'" rose at an 
annual compound rate of 17.4%.'^ The annual compound growth rate for skilled 
nursing faci 1 i t ies services rose only 2.8% while the rate for home health 
services rose 24.1%. 



80 



1 • lULt J '^-} -. Paym ent Met ho d o 1 o^i_e s 

As noted above, the initial payment methodologies for health care 
institutions under Part A and for services of physicians and suppliers under Part 
B were quite favorable to providers and were based on methodologies that 
conformed closely to provider billing and accounting practices. Until the Social 
Security Amendments of 1983, Medicare paid all Part A providers the reasonable 



'^Reimbursement Guid elines for Med icare : Hearing B efore the Senate Co mm. on 

Fina nce , 89th Cong., 2d Sess. (1966); Staff of Senate Comm. on Finance, Medicare 

and Medicaid: Proble ms, Issues, an d Alternatives . 91st Cong., 1st Sess. 53. 140- 
43 (Comm. Print 1970). 

'^'^ Twenty Years of Medic ar e and Medicaid at 42. 



75 



Id. at 43. 



'"See note 18 supra and accompanying text. 



'' Twenty Years of Medicare and Medicaid at 43, 
'^See note 18 supra and accompanying text. 



^^ Twenty Years of Medicare and Medicaid at 43 



80 



Id. 



MEDICARE APPEALS SYSTEM 



361 



cost of covered services"^ Congress delegated the definition of "reasonable 
cost" and the methodology for its determination to the Secretary of HEW to 
develop through regulations."^ A provider under Part A had to and still must 
accept Medicare payment as payment in full for a beneficiary's hospital stay and 
cannot charge the beneficiary any additional sums for covered benefits even if 
the institution's costs of providing the services exceeded Medicare's payment for 
those services. "^ 

Payments to physicians under Part B have always been based on the 
physician's charges but were limited to the physician's customary charge for the 
same or similar services, the maximum prevailing charge for that service of all 
physicians in the area or the physician's actual charge."'* Under its basic 
payment methodology for physicians' services, Medicare pays physicians 80% of the 
reasonable charge for all covered services provided. ^^ The reasonable charge for 
a specific service in most cases is calculated as the lowest of the physician's 
customary charge for the service, the prevailing charge for the service in that 



area or the physician's actual charge 



86 



Each July, carriers update the 



^•^Social Security Amendments of 1965 § 102(a), codified as amended in . 
Social Security Act §§ 1861(v) and 1871, 42 U.S.C. §§ 1395x(v) and 1395hh (1982 
ed . , Supp . II). 

Under the retrospective cost reimbursement system. Medicare reimbursed 
direct costs, such as room, board and nursing care, that are directly related to 
patient care and generally pertain to services for which charges can be made. 
Medicare also paid indirect costs, i.e., those not directly attributable to 
patient care but incurred in the operation and administration of a hospital. 
Included among indirect costs are the major capital cost of providers; i.e., 
depreciation on a provider's plant buildings and equipment; interest on capital 
debt, lease expenses for capital assets, and, for proprietary providers only, a 
reasonable return on equity capital. Social Security Act § 1861 (v), 42 U.S.C. § 
1395x(v) (1982 ed., Supp. II); 42 C.F.R. §§ 405.402-.482 (1986). 

^^soclal Security Act § 1861(v); 42 U.S.C. § 1395x(v) (1982 ed. , Supp. II). 



83 



Social Security Act § 1866(a)(1), 42 U.S.C. § 1395cc(a)(l) (1982 ed. , Supp 



II). 



°'*Social Security Amendments of 1965, § 102(a), codified as amended In , 
Social Security Act § 1842(b)(3)(F), 42 U.S.C. § 1395u(b) (3) (F) (1982 ed., Supp, 
II). See Medicare: Paying the Physician at 20. 



85 



Social Security Act §§ 1833(a)(1), 42 U.S.C. § 13951(a)(1) (1982 ed 
Supp. II); 42 C.F.R. §§ 405.501-515. (1986). 



^^Soclal Security Act § 1842(b)(3)(F), 42 U.S.C. § 1395u(b) (3) (F) (1982 ed. , 
Supp. II); 42 C.F.R. § 405.502(f)(5) (1986). 



362 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

customary charge of each individual physician and also the prevailing charge of 
all physicians with comparable qualifications in the carrier's sorvice area.®^ 
Unlike Part A. physicians and suppliers paid under Part B are not required to 
accept Medicare payment as payment in full on any benefit claim unless they 
accept the claim from the beneficiary. ° 

2 Ramifi cations of Early Payment Methodol ogies 

The cost problem has plagued Congress and HHS policy makers since the 
Inception of the Medicare program and has dominated the health policy debate 
during this time. Early in the program, a consensus emerged among federal policy 
Makers, Congress and other observers that cost reimbursement was a fundamental 
cause of the inflation in Medicare hospital expenditures .°^ The theory was 
simply that since hospitals could be assured of payment for all the reasonable 
costs of covered services, they were rewarded for providing more services at 
higher cost. While lucrative for hospitals, these incentives translated into 
increasingly greater costs for the Medicare program and resulting pressure on 
administrations of both political parties, Congress and the hospital industry to 
find ways to reduce the rate of increase in Medicare hospital expenditures.^ In 
1983, as will be discussed below, Congress fundamentally changed the way in which 
Medicare pays hospitals for services provided to Medicare beneficiaries in the 

. Q1 

new prospective payment system. ^^ 

Physicians, likewise, had comparable incentives to provide more services at 
greater cost to the Medicare program. This payment methodology also encourages 
physicians and suppliers to break down services into components for which a 



^''social Security Act §§ 1833(a)(2) and 1842(b)(3)(F). 42 U.S.C. § 
1395f(a)(2) and § 1395u(b) (3) (F) (1982 ed . , Supp. II); 42 C.F.R. § 405.503 (1986). 

°°See notes 49-53 supra and accompanying text. Suppliers of durable medical 
equipment are paid according to metholodogies that are similar to payment of 
physicians. See Generally Medicare: Pa yi ng the Physician . 



^^ See, e.g . . M. Feldstein and A. Taylor, The Rapid Rise of Hospital Costs 
(1977); M. Zubkoff, I. Raskin & R. Hanft, Hospital Cost Containment (1978). A 
similar consensus emerged with respect to skilled nursing facility costs and 
Congress as well as HHS has inaugurated several cost containment strategies and 
reforms in the reimbursement of skilled nursing facilities over the years. 

^^ 20 Years of Medicare and Medicai d, Health Care Fin. Rev. (1985 Annual 
Supp.) (comments of Senator Dave Durenberger, Congressman Dan Rostenkowski , J. 
Alexander McMahon, and Michael D. Bromberg) . 

^^See notes 150-191 infra and accompanying text. 



MEDICARE APPEALS SYSTEM 363 

charge can be made in order to maximize reimbursement.^^ The Part H payment 
methodology, like the cost reimbursement system for hospitals and other health 
care institutions, has encouraged unwarranted growth in Medicare expenditures for 
Part B services and Congress and HHS are currently considering major reforms of 
Part B payment methodoJogios . "* 

B- The Search fo r Sol utions 

To control these Medicare program expenditures, Congress by statute and HEW 
by regulation adopted numerous cost containment strategies and conducted several 
demonstration projects to explore ways to change Medicare payment methodologies 
to achieve cost savings. Most of these efforts were targeted at hospital costs 
because this is where policy makers perceived the greatest problem. Some 
measures were targeted at skilled nursing facilities and home health agencies as 
well, although these reforms are not addressed in this analysis. In recent 
years, policy makers and Congress have focused more attention on the cost of 
services under Part B. 

1 . H ospi t al Payment Reform 

The Social Security Amendments of 1972 . In the Social Security Amendments 
of 1972 ,^'* Congress adopted several regulatory measures to control hospital 
costs. The most important of these measures were in § 223 of the Social Security 
Amendments of 1972.^^ Section 223 provided that Medicare should not reimburse 
any costs that were uiuiecessary for the provision of patient care services, and 
the regulations under § 223 imposed a limit on routine inpatient costs. ^^ With 
this limit. Congress and the Medicare program departed from recognizing all the 
costs of liospitals in providing care to Medicare beneficiaries and imposed 
regulatory controls on payments to hospitals to force hospitals to deliver 
services in a more cost effective manner. 

The Social Security Amendments of 1972 also authorized the Secretary of HEW 
to withhold reimbursement for capital costs associated with a capital expenditure 
that a designated state health planning agency found was inconsistent with its 



Jencks & Dobson. s upra note 53. See also. Medicare: Paying the Physician : 
Reform of Medicare Payments to Physicians: H eari ng Before the Subco mm. on Health 
of t he Senate Comm. on Finance , 99th Cong., 1st Sess. (1985) [hereinafter cited 
as "Se nate Finance Comm. Hearings on Reform of Medicare Pa yments to Ph ysicians " ] . 

^^See notes 142-149 i nfra and accompanying text. 

^■^Social Security Amendments of 1972, Pub. L. No. 92-603, 86 Stat. 1329 
(1972) [hereinafter cited as "Social Security Amendments of 1972"]. 

^^Social S(;curity Amendments of 1972 § 223, codi fied as amended i n. Social 
Security Act § 1843x(v), 42 U.S.C. § 1395x(v) (1982 ed . , Supp. II). 

^^42 C.F.R. § 405.460 (1986). 



364 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

own herilth planning criteria, standards and health plans. ^^ The Social Security 
Amendments of 1983 required states to adopt such capital expenditure review 
programs under § 1122 of the Social Security Act. meeting certain critt?ria if 
Congress does not incorporate capital costs into the Medicare prospective payment 
system by 1986.^^ and Congress subsequently extended this deadline to FY 1987.^^ 
However, this provision has not been implemented and likely will not be since 
Congress or FIHS will probably incorporate capital costs into the prospective 
payment system for FY 1987 J^^ 

On the assumption that excess and unnecessary utilization of hospital 
services by Medicare beneficiaries was a fundamental cause of escalating Medicare 
costs and that the required utilization review of hospitals for Medicare patients 
had beeti ineffective,'^^ Congress authorized establishment of federally funded, 
private Professional Standards Review Organizations (PSROs) to conduct 
independent utilization and quality review of hospital services under the 
Medicare and Medicaid programs. ^^^ The concept was that physicians would review 
the quality and appropriateness of health care services that their peers provided 
to Medicare beneficiaries. 



^^Social Security Amendments of 1972 § 221(a), codified as amended in . 
Social Security Act § 1122, 42 U.S.C. § 1320a -1 (1982 ed . , Supp. 11). 

^^Social Security Amendments of 1983, Pub. L. No. 98-21 Title VI, § 601 (o). 
97 Stat. 65, 162 (1983) [hereinafter cited as "Social Security Amendments of 
1983"]. codi fied as amended in . Social Security Act § 1886(g)(1). 42 U.S.C. § 
1395ww(gr(l) (1982 ed . , Supp. II). 

^^Urgent Supplemental Appropriations Act, 1986, Pub. L. No. 99-349. Title 
II, § 206 (1986), amending Social Security Act § 1886(a)(4) and (g)(i); 42 U.S.C. 
§ 1395ww(a)(4) and (g)(1) (1982 ed., Supp. II). 

^^^See notes 167-168 i nfra and accompanying text. 

^^^Social Security Amendments of 1965. § 102(a), codified as amended in . 
Social Security Act § 1861(k). 42 U.S.C. § 1395x(k) (1982 ed . , Supp. II). 

As a condition of participation in the Medicare program, hospitals had to 
have a utilization review program to evaluate the medical necessity and 
appropriateness of hospital services provided Medicare beneficiaries. Id. Similar 
requirements were imposed on skilled nursing facilities. Id . 

^^^social Security Amendments of 1972 § 249F(b), codified as amended in . 
Social Security Act § 1151 et seq. , repealed . Peer Review Improvement Act of 
1982. Title I. Subtitle C of the Tax Equity and Fiscal Responsibility Act of 
1982. Pub. L. No. 97-248. § 143. 96 Stat. 324. 382 (1982) [hereinafter cited as 
"Tax Equity and Fiscal Responsibility Act of 1982]. See A. Gosfield, PSROs: The 
Law and the Health Consumer (1975). 



MEDICARE APPEALS SYSTEM 



365 



The PSRO program had difficulties getting implemented and experienced 

equivocal success. ^"^ Physicians unsuccessfully challenged the program as a 

violation of the constitutional rights of physicians and their patients.-'^'* 

Ultimately federal policy makers and Congress questioned the effectiveness of the 

ins 
program in controlling costs. ^^"^ In its early years, the Reagan administration 

sought to dismantle the program on grounds that it was excessively regulatory in 

addition to being ineffective.^^" Congress formally terminated the program-- 

while still embracing the concept of peer review as means to control utilization 

under the Medicare program — when it repealed the 1972 PSRO legislation and 

enacted the Peer Review Improvement Act of 1982.^^' 

Medi care P ayment Demonstration Projects . Shortly after the Medicare program 

began, Congress authorized the Secretary of HEW to waive Medicare program 

requirements in order to conduct demonstrations of different payment 

methodologies . ^^^ In th«o Social Security Amendments of 1972, Congress expanded 

this demonstration authority to test prospective payment methodologies. ^ Over 



^"^PSRO Proposals: Hearing on S .125 0, S.2142 Befor e the Subcomm. on Health 
o f the Senate Comm . on Finance , 97th Cong., 2d Sess. (1982); Proposed Phas eo ut of 

PSRO 's a nd U t ilization Review Requi r eme nt s: Hearing Before the Subcomm. on 

Health of the Senate Comm. on Finance , 97th Cong., 1st Sess. (1981); Professiona l 

Standa r ds Review Orga n izat ion (PSRO) Progr a m: Hearing Before the Subcomm. in 

O vers igh t and the Subcomm . on Health of the House Comm. on Ways and Means , 97th 
Cong. , 1st Sess. (1981) . 

^^'*Association of American Physicians and Surgeons v. Weinberger, 395 F. 
Supp. 125 (N.D. 111. 1975). a ff'd sub, nom without opinion ; Association of 
American Physicians and Surgeons v. Mathews, 423 U.S. 975 (1975). See generally 
Gosfield, Medical Necessity In Medicare and Medicaid: The Implications of 
Profess ional Standards Review Orga niz ations , 51 Temp. L.Q. 229 (1978). 



105 



See note 103 s upra and 106 infra . 



^Q^ PSRO Proposals : Hearing on S 1250 , S 2142 Before the Su bcom m. on Health 
of the Senate Comm. on Finance , 97th Cong., 2d Sess., 6-11 (1982) (statement of 
George Thompson); Executive Office of the President, Office of Management and 
Budget, FY 1982 Budget Revisions 70 (1981). 

^^"^Peer Review Improveiment Act of 1982 of the Tax Equity and Fiscal 
Responsibility Act of 1982 §§ 141-150, a mendi ng Social Security Act §§ 1151-1163, 
42 U.S.C. §§ 1320C-1--12 (1982 ed., Supp. II). 

^O^Social Security Amendments of 1967, Pub. L. No. 90-248, § 402. 81 Stat. 
821, 930 (1967) . 



109 



Social Security Amendments of 1972 § 222(a) 



366 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

the next ten years Congress conducted severaJ demonstrations In various 
states. ^^^ The hypothesis of these demonstrations was that retrospective cost 
reimbursement was Inflationary as it contained incentives for hospitals to 
provide excessive services and that methodologies paying hospitals a 
predetermined price or requiring hospitals to stay within an overall limit or 
budget regardless of costs would provide the appropriate incentives for hospitals 
to contain costs. 

This hypothesis was borne out in these demonstrations and prospective 
payment systems for other third party payers besides Medicare. ^^^ Congress and 
states were so impressed with the results ot these state prospective payment 
systems that Congress authorized states to establish these systems for Medicare 
and other payers on a nonexperimental basis in the Tax Equity and Fiscal 
Responsibility Act of 1982^^^ and. in the Social Security Amendments of 1983, 
expressly allowed states to opt out of the Medicare prospective payment system 
and establish state prospective payment systems for all payers.^ 

The Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) . T E F R A 
instituted major reforms to address the cost problems of the Medicare program. 
In TEFRA, Congress modified the per diem cost limit established under § 223 of 



^^^See Health Care Financing Administration, The National Hospital Rate- 
Setting Study: A Comparative Review of Nine Prospective Rate-Setting Programs 
(Aug. 1980) (reporting on these demonstrations). 

It should be noted that the DRG pricing concept was tested in the New Jersey 
prospective payment demonstration. 

^^^See Biles. Schramm and Atkinson, Hospital Cost Containment Under State 
Rate-Setting Programs , 303 New Eng. J. of Med. 664 (1980); Cromwell and Hewes, 
M edicare Expenditures and Utilization under State Hospital Rate Setting , Health 
Care Fin. Rev., Fall 1985, at 97; Steinwald and Sloan, Regulatory Approaches to 
Hosp ital Cost Containment: A Synthesis of the Empirical Evidence 1 n A New 
Approach to the Economics of Health Care (M. Olson, ed . 1981). 

^^^Tax Equity and Fiscal Responsibility Act of 1982, § 101(a)(1), codified 
as amended in . Social Security Act § 1886(c), 42 U.S.C. § 1395ww(c) (1982 ed . , 
Supp. II). 

^^^Social Security Amendments of 1983 § 601(c)(1); codified as amended in . 
Social Security Act § 1886(c), 42 U.S.C. § 1395ww(c) (1982 ed . , Supp. II). See 
American Hospital Association, How States Can Opt Out of the Federal Medicare DRG 
System: A Summary of Legal Issues (1983). 

Currently, only Maryland and New Jersey have Medicare waivers to operate 
state all-payer prospective payment systems. 

^^''Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. No. 97-248, 96 
Stat. 324 (1982). 



MEDICARE APPEALS SYSTEM 367 

the Social Security Amendments of 19721^^ to a limit on the costs allowed for 
each Medicare patient caseH^ This change to regulation on a per case rather 
than a per diem basis represented an important conceptual departure from previous 
cost containment strategies as well as an important step in moving hospitals 
toward a prospective payment system. Also, in TEFRA, Congress imposed a limit on 
the rate of increase in a hospital's routine operating costs. ^^' Hospitals with 
cost increases exceeding their target rate of increase limits were penalized 
while hospitals that kept increases below their target rate received part of the 
realized savings. -^^^ Allowing hospitals to retain savings was likewise a radical 
departure from previous cost containment strategies. Congress conceived the 
TEFRA limits as the foundation for a future prospective payment system and, in 
TEFRA, directed HHS to prepare a legislative proposal for a prospective payment 
system on hospitals for consideration in the next session of Congress. ^^^ 

The Peer Review Improvement Act of 1982 . As part of TEFRA, Congress enacted 
the Peer Review Improvement Act establishing a new peer review program to perform 
utilization and quality of review of hospital services provided to Medicare 
beneficiaries . -^^^ To conduct these review activities, Congress authorized the 
Secretary to contract with private, physician-controlled peer review 



^^^See notes 94-96 supra and accompanying text. 

^^^Tax Equity and Fiscal Responsibility Act of 1982 § 101(a)(1), codified as 
amended in . Social Security Act § 1886(a)-(b), 42 U.S.C. § 1395ww(a)-(b) (1982 
ed. , Supp. II) . 

1^'^Tax Equity and Fiscal Responsibility Act of 1982 § 101(a)(1), co dified as 
amended in . Social Security Act § 1886(a). 42 U.S.C. § 1395ww(a) (1982 ed . . Supp. 
II). 

^^^Tax Equity and Fiscal Responsibility Act of 1982 § 101(a)(1). codified as 
amended In . Social Security Act § 1886(b)(1). 42 U.S.C. § 1395ww(b)(l) (1982 ed., 
Supp . II). 

^^^Tax Equity and Fiscal Responsibility Act § 101(b)(3). codified as amended 
in. Social Security Act § 1135(c), 42 U.S.C. § 1320b-5(c) (1982 ed.. Supp. II). 

This statutory directive also called for HHS to develop a legislative 
proposal for prospective payment of skilled nursing facilities. rd. 

^20peer Review Improvement Act of 1982 of the Tax Equity and Fiscal 
Responsibility Act of 1982 §§ 141-150, codified as amended in . Social Security 
Act §§ 1151-1163, 42 U.S.C. 1320c-l--12 (1982 ed . , Supp. II). See Dans. Weiner & 
Otter, Peer Review Organizations: Promises and Pitfalls . 31 New Eng. J. of Med. 
1131 (1985); Gosfield. Hospital Utilization Control by PROs : A Guide Through the 
Maze , Healthspan. Feb. 1985. at 3; Grimaldi S Micheletti, Implementation of the 
Peer Review Organization Program , QRB. Nov. 1984, at 340. 



368 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

organizations meeting certain rharacteristics^ '^^ for each state or. wherr 
warranted, region of the country. Specifically, licensed physicians with 
active admitting privileges in local hospitals must conduct and supervise PRO 
reviews; and. also, only physicians can make final determinations to deny payment 
for services provided Medicare beneficiaries. As of November 1985, HCFA had 
contracted with 54 PROs for all states and territories. ^^^ Most PROs are former 
PSROs supported by the state medical association, and in three cases the statp 

1 9S 

medical association is the PRO.'' 

The chief function of PROs is to ensure the medical necessity, quality, and 
appropriateness of hospital services provided to Medicare beneficiaries.^ In 
addition. Congress accorded important new monitoring functions to PROs under the 
prospective payment system which will be described in greater detail below. ^^ 
To accomplish these functions effectively, PROs have authority to deny Medicare 
payment for inappropriate or unnecessary services and to recommend that certain 
providers and physicians be excluded even permanently from the Medicare program 



^21to qualify as a PRO. an organization must be either a "physician 
sponsored" or "physician-access" organization. Social Security Act § 1153(a)(1), 
42 U.S.C. § 1320c-2(a)(l) (1982 ed . , Supp. II); 42 C.F.R. § 462.101 (198f.) A 
physician-sponsored organization is composed of a substantial number, i.e.. 20% 
of the practicing physicians in the community. Id. at § 462.102(b) and (c). A 
physician -access organization may be a nonprofit or for-profit organization 
established to conduct peer review but must demonstrate that it uses physicians 
in its review functions. Id. at § 462.103. A PRO may not have any formal 
association with a medical facility. Social Security Act § 1153(b)(3), 42 U.S.C. 
§ 1320C-2 (1982 ed . . Supp. II). 

^^^Social Security Act § 1153(a)(1), 42 U.S.C. § 1320c-2 (1982 ed.. Supp. 
II); 49 Fed. Reg. 7,202, codified in 42 C.F.R. § 462.107 (1986). Congress also 
authorized designation of a "Super PRO" to evaluate the performance of PRO's. 
Social Security Act § 1153(d); 42 U.S.C. § 1320c-2 (1982 ed., Supp. II). 

^23social Security Act § 1154(c). 42 U.S.C. 1320c-3 (1982 ed., Supp. IT). 

^^"^Dans, Wiener and Otter, supra note 44. at 1132. Seven PRO's were located 
outside the states and territories for which they were responsible. Id . 



125 



Id 



^26social Security Act § 1154(a)(1), 42 U.S.C. 1320c-3(a) ( 1 ) (1982 ed.. 
Supp. II). 



^^'See notes 193-197 infra and accompanying text 



MEDICARE APPEALS SYSTEM 369 

because of their utilization patterns and practices . ^28 Congress has accorded 
PROS a broader scope of review, more authority and greater flexibility than PSROs 
had enjoyed. To accomplish this flexibility, Congress authorized the Secretary 
to contract with PROs to perform agreed upon functions and meet agreed upon goals 
during a two year contract period. ^^^ By statute, the PRO contract must specify 
the negotiated objectives of the PRO against which its performance will be 
judged, require the PRO to perform statutorily mandated review activities and 
other functions, and state the Secretary's right to evaluate the quality and 
effectiveness of the PRO in discharging its contracted functions . -^"^^ 

HHS ' s implementation of the PRO program has been controversial. HCFA was 
very slow in getting the program started. These delays were a matter of 
considerable concern to Congress which endorsed the concept that only physician- 
controlled entities were qualified to make determinations about whether the 
medical criteria for coverage of hospital services has been met and whether 
hospitals were providing quality services to Medicare beneficiaries . ^^^ One 
chief reason for the controversy is that HCFA has relied on program directives 
and contract provisions to delineate the specific responsibilities of PROs under 
the PRO program. ^■'^ The American Hospital Association successfully challenged 



^28social Security Act § 1156(b)(1), 42 U.S.C. 1320c-5(b) (1 ) (1982 ed., 
Supp. II); 50 Fed. Reg. 15,335 (1985), codified in , 42 C.F.R. § 474.32 (1986). 

"^^Qsocial Security Act § 1153(b)(1), 42 U.S.C. § 1320c-2(b) (1 ) (1982 ed. , 
Supp. II). 

Under the PSRO program, the Secretary awarded grants to PSRO's, and PSRO 
functions and objectives were specified by statute and regulation. See A. 
Gosfield, supra note 26, at 9. Congress concluded that these characteristics of 
the PSRO program were partially responsible for the poor performance of PSRO's. 

^^^Social Security Act § 1153(c), 42 U.S.C. § 1320c-2(r) (1982 ed. , Supp. II). 

^'^^ See Peer Review Organizations: Hearings Before the Subcomm. on Health of 
the Senate Comm. on Finance , 99th Cong., 1st Sess. 2 (1985) [hereinafter cited as 
" Senate Finance Comm. Hearings on Peer Review Organizations " ] ; Implementation of 
PRO'S for Medicare: Hearing Before the Subcomm. on Health of the Senate Comm. on 
Finance 98th Cong., 2d Sess. 38-40 (1984) [hereinafter cited as " Senate Finance 
Comm. Hearings on Implementation of PRO's for Medicare "] . 

-^^^See PRO Manual IM85-2 replacing PSRO Transmittal No. 107; PRO Manual 
IM85-3 replacing PSRO Transmittal No. 108; Medicare Hospital Manual Transmittal 
No. 367, § 287. 4A; and Medicare Intermediary Manual transmittal No. 1079 § 3789c 
and No. 1102; PRO Directive No. 2; Request for Proposal (RFP No. HCFA-84-015, 
Feb. 29, 1984). 



370 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

this impli'mentriUon method in Amgrican Ho spital Association v. Bowen J-^^ In this 
decision, discussed l)elow, the United States District Court for the District of 
ColnmbJH invalidated many of the pro^iram dir<'ctives that HCFA nsi-d to implrmrnt 
the PRO program on grounds that were not piomulgated as rules under the 
Administrat iv«' Procedure? Act .^^^ 

Congress has exhibited considerable dissatisfaction with the imfilc^ment at ion 
of tlie PRO program The Senate Finance Committee has held hearings on the 
program's implementation on two occas icuis . '•^''* In the Consol iflat ed Omnibus Budget 
Reconciliation Act of 1985. Congress instituted several changes in the PRO 
piogram to increase the responsibilities of PROs to monitor the quality of 
hospital care for Medicare beneficiaries . ^^^ Still not satisfied with the 
performance of the PRO program, Congress is considering additional legislative 
reforms in the budget legislation for FY 1987 to improve PRO quality of care 
reviews and enhance protection for beneficiaries from PRO and hospital decisions 
rf.'gai fli tig the need for continued hospital cart?. ' 

2 . P hysician Pay m ent Reform 

Congress and federal po]if:y makers have given far less attention over the 
years to reforming physiciati reimbursement than to hospital reimbursement. In 
part, this is because Part B costs represented a lesser proportion of the total 
Medicare cost problem . '"^*^ Another factor is that the medical prrtfession is 
politically powerful and has resisted reforms in Part B. Since the inr^eption of 
Medicare in 1965, Congress has adopted only a few cost containment measures for 
Part B and these measures tended to address special problems of certain groups of 
physicians. Spe»-.i f ical ly , major reforms of Part B before 1983 included limiting 
the rale of increase in the prevailing charge to an index which reflects 



^^'^No. 85 Orni (D.D.C. May 30, 1986). 

'•^■^S use. § 553 (1983 ed . , Supp. TI). See notes 417-418 infra and 
accompanying text. 

^ '^ "^ See Sen ate Fi nance Comm . Hearings on Implementation of PRO' s for 
Medicare ; Senate Finance Comm. Hearings on Peer Review Organizations . 

^^^'Consol idat(>d Omnibus Budget Reconciliation Act of 1985, Pub. L. No. 99- 
272, Title IX, §§ 9401-9406, 100 Stat. 82 (1986) [hereinafter cited as 
"Consolidated Omnibus Budget Reconciliation Act of 1985"J (codified as amended 
in scattered sections of the Social Security Act). 

^'^"^See H.R. 5300, § 10241, 99th Cong.. 2d Sess . (1986); S. 2706. §§ 631 633, 
99th Cong., 2d Sess. (1986). See al so H.R. Rep. No. 727, 99th Cong., 2d Sess. 
457 460 (1986); S. Rep. No. 348, 99th Cong., 2d Sess. 146 148 (1986). 

1 38 

* See notes 78 79 sup ra and acf^ompany i ng text. 



MEDICARE APPEALS SYSTEM 371 

inflation, ^'^'^ reforming payment methods for physicians in teaching hospitals,^ ■ 
and tightening up payment methods for hospital-based physicians — i.e., 
anesthesiologists, pathologists and radiologists having contract arrangements 
witli hospitals . ^^^ 

T he Deficit Reduction Act of 1984 (DEFRA) . In DKFRA, Congress instituted 
the first major reform of physician reimbursement since the inception of the 
Medicare program. Conceived as basically an interim measure until more 
comprehensive reforms were enacted, Congress imposed a freeze on the charges of 
physicans and suppliers of durable medical equipment for a fifteen-month period 
commencing July 1, 1984, until September 1985.^'*^ The medical profession 
unsuccessfully challenged this freeze on constitutional grounds in American 

14*^ 

Medical Association v. Heckler . ^ ^'- 

DEFRA also contained incentives for physicians to accept assignment and 
become "participating physicians" in the Medicare program. Specifically, those 
physicians and suppliers who voluntarily accept assignment for all Medicare 
patients are permitted to raise their charges for purposes of the future 
calculation of their customary charge during the freeze period whereas non- 
participating physicians and suppliers are not permitted to raise charges either 
in the present or for purposes of calculating future charges.^'*'* As a result of 



■^^^Social Security Amendments of 1972 § 224(a), codified as amended in . 
Social Security Act § 1842(b)(3)(F), 42 U.S.C. § 1395u(b) (3) (F) (1982 ed . , Supp. 
II); 42 C.F.R. § 405.509 (1986). 

^■^^Social Security Amendments of 1972 § 227(b)(2), codified as amended in . 
Social Security Act § 1814, 42 U.S.C. § 1395f (1982 ed . , Supp. II). 

^"^^Tax Equity and Fiscal Responsibility Act of 1982 § 108(a)(1), codified as 
amended in . Social Security § 1887, 42 U.S.C. § 1395xx (1982 ed . , Supp. II); 42 
C.F.R. §§ 405.550-.557 (1986). 

I'^^Deficit Reduction Act of 1984, Pub. L. No. 98-369, § 2306, Division B, 
Title III, 98 Stat. 494, 1070 (1984) [hereinafter cited as "Deficit Reduction Act 
of 1984"] amending . Social Security Act § 1842(b), 42 U.S.C. § 1395u(b) (1982 
ed . , Supp . II). 

l'*^606 F. Supp. 1422 (S.D. Ind. 1985). 

^'^'^Deficit Reduction Act of 1984 § 2306(c) amending , Social Security Act § 
1842, 42 U.S.C. § 1395U (1982 ed . , Supp. II). 



372 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

these Incentives, the number of physicians becoming "participating physicians" 
was nearly 30% and assignments have increased dramatically. '*^ 

T he Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) . I n 
COBRA. Congress made additional changes in the Part B payment methodologies. The 
chief measures include extending the freeze of the charges of physicians and 
suppliers of durable medical equipment established in DFFRA until September 1986 
and enhancing the incentives for physicians and suppliers to accept assignment 
and become "participating physi cians . " ^'*^ Further. COBRA directed the Director 
of the Office of Technology Assessment (OTA) to appoint an eleven member 
Physician Payment Review Commission by May 1. 1986, to perform an analytical and 
evaluative function for physician payment comparable to the role of the 
Prospective Payment Assessment Commission under the prospective payment system 
for hospitals . ^^'^ 

Future Reforms . Congress and HHS have given greater attention to how to 
reform Part B payment methodologies lr» the last three years than ever before. In 
the Social Security Amendments of 1983, Congress directed the Secretary to study 
how to pay physicians according to a methodology using Diagnosis Related 
Groupings (DRG's).^"*^ This mandate has precipitated an examination of how 
Medicare pays physicians and other suppliers of services under Part B and has 
generated prooosals for fundamental modification of Part B payment 
methodologies. It is clear that Congress plans to enact legislation to reform 
Part B payment methods in the near future and that these payment methods will be 
fundamentally different from those Medicare uses currently. 



^'*^Health Care Financing Administration, Me dica r e Participating Physician 
and Supplier Program: Fact She et (Jan. 1985). Similar results were seen for 
suppliers of durable medical equipment as well. Id. 

^'^^Consolidated Omnibus Budget Reconciliation Act of 1985, § 9301, amending . 
Social Security Act § 1842(b). 42 U.S.C. § 1395u(b) (1982 ed. . Supp. II). 

^'^'^Consoll dated Omnibus Budget Reconciliation Act of 1985 § 9305, amending . 
Social Security Act § 1845, 42 U.S.C. § 1395x (1982 ed . , Supp. II). This 
commission has been selected and Is conducting its work. 

^^^Soclal Security Amendments of 1983 § 603(a)(2)(B). 

^^^See S enate Finance Comm. Hearings on Reform of Medicare Payments to 
Physicians , Medicare: Paying the Physician; Jencks & Dobson, supr a note 53; 
Burney, Hickman, Paradise & Schieber, Medicare Physician Payment, Participation, 
a nd Reform, Health Affairs, Winter 1984, at 5; Fox, Physician Reimbursement Under 

Med icare : A n Overview a nd a Proposal f or Area-Wide Physician Incentives , and 

Had ley. Critique of Peter Fox's "Physician Reimbursement Under Medicare: An 
Over view and a Proposal for Area Wide Physician Incentives , in House Comm. on 
Ways and Means, Proceedings of the Conference on the Future of Medicare , 98th 
Cong., 2d Sess. 108-128 (1984)." 



MEDICARE APPEALS SYSTEM 373 

3. The Solution to the Hospital Cost Problem: The Prospective Payment System 

As the solution to the problem of hospital costs, Congress enacted the 
prospective payment system in April 1983. ^^^ This system, which started October 
1, 1983, fundamentally changed how Medicare pays acute care hospitals for 
services to Medicare beneficiaries . ^^^ Specifically, Congress discontinued 
paying hospitals the reasonable cost of covered services on a retrospective basis 
and began paying hospitals a prospectively determined price for each Medicare 
case. 

The Rate Structure . The basic premise of the prospective payment system 
established under the Social Security Amendments of 1983 is that Medicare will 
pay hospitals a predetermined fixed price for each patient case regardless of the 
cost the hospital incurs In treating that patient. The theory is that this 
approach will reverse the incentives of the retrospective cost reimbursement 
system which encouraged hospitals to Incur costs and thereby increase their 
Medicare reimbursement . ^^^ Under the prospective payment system, Medicare would 
establish the price for a patient case beforehand and hospitals can retain 
savings if they treat the patient for less than that price. Thus, hospitals have 
an incentive to use less resources and reduce costs in treating patients. 
Indeed, it is this change in incentives that Congress, the Administration and 
also hospitals sought to accomplish with the prospective payment, as HHS stated 
in its 1982 report to Congress on its proposal for the prospective payment 
system :^^^ 



^^^Social Security Amendments of 1983 § 601(e), codified as amended in , 
Social Security Act § 1886(d) passim , 42 U.S.C. § 1395ww(d) passim (1982 ed. , 
Supp. IT). 

^^^The prospective payment system applies only to acute care hospitals; 
rehabilitation, psychiatric and children's hospitals are not included in the 
prospective payment system nor are units in acute care hospitals that provide 
rehabilitative, psychiatric or pediatric services. Social Security Act 
§ 1886(d)(1)(B); 42 U.S.C. § 1395ww(d) (1 ) (B) (1982 ed., Supp. II); 42 C.F.R. § 
412. 20-. 32; (1986). 

The Secretary is also authorized to make exceptions and adjustments under 
the prospective payment system for regional and national referral centers, sole 
community hospital, cancer hospitals and hospitals serving a disproportionate 
number of Medicare and low income patients. Social Security Act § 1886(d)(5)(C), 
42 U.S.C. § 1395ww(d)(5)(C) ; 42 C.F.R. § 412.90-. 104 (1986). 

^^^See notes 89-90 supra and accompanying text. 

^^^H.R. Rep. No. 25, 98th Cong., 1st Sess . 132 (1983); Secretary of the 
Department of Health and Human Services, Report to Congress on Hospital 
Prospective Payment for Medicare 101-110 (1982) [hereinafter cited as " HHS Report 
to Congress " ] . See Hospital Prospective Payment System: Hearings Before the 
Subcomm. on Health of the Senate Comm. on Finance , 98th Cong., 1st Sess. (1983) 
[hereinafter cited as " Senate Finance Comm. Hearings on Hospital Prospective 



374 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

The ulllmate objective of PPS Is to set a reasonable price 
for a known product. This provides Incentives for hospitals 
to produce the product more efficiently. When PPS is in 
place, health care providers will be confronted with strong, 
lasting incentives to restrain costs for the first time In 
Medicare history. ^^^ 

The Social Security Amendments of 1983 provided that the Medicare program 
will base Its prices for Medicare hospital cases on a comprehensive 
classification system comprised of 470 mutually exclusive categories called 
"Diagnosis Related Groupings" ("DRGs").^^^ The basic premise of DRGs is that all 
human disease conditions can be classified according to disease system, length of 
stay, intensity of resources consumed, morbidity, and sex and that such 
categories reflect the average cost of providing hospital services to all 
patients with diseases that fall in a DRG.^^^ 



Payment System " ] ; Medicare Hospit a l Prospective Payment System: Hearings B efore 
the Subcomm. on Health of the House Comm. on Ways and Means , 98th Cong. . 1st 
Sess. (1983) [hereinafter cited as " House Ways and Means Comm. Hear i ngs on 
Medicare Hospital Prospective Payment System "]; 20 Years of Medicare and 
Medicaid , Health Care Fin. Rev. (1985 Annual Supp. ) (comments of J. Alexander 
McMahon and Congressman Dan Rostenkowski ) . 

^^"^ HHS Report to the Congress at 3. 

^^^Social Security Amendments of 1983, § 601(e), codified as amended In , 
Social Security Act § 1886(e), 42 U.S.C. § 1395ww(e) (1982 ed . , Supp. 11). 

^^^This case classification system was developed at Yale University 
Initially to describe the type of patients admitted to hospitals and, later, 
under contract with HCFA, to serve as a basis of a pricing system for hospital 
payment. This classification system is based on the International Classification 
of Diseases, Ninth Revisi o n, Clinical Modification , developed by the World Health 
Organization. The system is comprised of 23 major diagnostic categories (MDC's), 
representing a broad clinical category based on body system involvement and 
disease etiology and differentiated from all other clinical categories. The 
MDC's are then broken down into DRG ' s according to principal diagnosis, secondary 
diagnosis, surgical procedures, age and sex. There are 470 mutually exclusive 
and comprehensive DRG ' s . A list of the DRG ' s is included in Appendix A. HCFA 
has assigned weighting factors to reflect the relative use of hospital resources 
for each of 467 DRG's. The remaining three DRG's are administrative categories 
to assign certain types of cases for special treatment by the fiscal 
intermediary, e.g., discharges with an operating room procedure unrelated to a 
given MDC or a diagnosis based on invalid data. Preamble to Interim Final Rule, 
48 Fed. Reg. 39.752 (1983), at 39,760-761. See Prospective Payment Assessment 
Commission, Technical Appendixes to the Report and Recommendations to the 
Secretary, U.S. Department of Health and Human Services, April 1, 1985 , Appendix 
A. at 14-17 [hereinafter cited as " Technical Appendixes to the ProPAC Report and 



MEDICARE APPEALS SYSTEM 375 

The Medicare price is determined by taking the product of an average price 
per case for all Medicare cases, called the "standardized amount"^^' and the 
weight of the DRG assigned to the particular patient's case, according to the 
following formula: 

Standardized Amount X DRG Weight = Price per Case.^^^ 

However, if a particular case is a so-called "outlier" and greatly exceeds the 
cost and length of stay ordinarily required for a case in the DRG to which the 
case would be assigned, Medicare will pay more for that case than the DRG 
price. ^^^ 

The calculation of the standardized amount is complicated. Through FY 1986, 
the standardized amount includes two components: (1) the individual hospital's 
average cost per Medicare case, i.e., the "hospital-specific" component;^"" and 
(2) the average cost per case for all urban and all rural hospitals, i.e., the 



Recommendations to the Secretary, April 1, 1985 "]. See also Yale School of 
Organization and Management, Health Systems Management Group, The New ICD-9-CM 
Diagnosis Related Groups (DRGs) Classification Scheme, Final Report (1982). 

l^'^Social Security Act § 1886(d)(2)(D), 42 U.S.C. § 1395ww(d)(2)(D) (1982 
ed. , Supp. II) . 

■* ^ " Technical Appendixes to the ProPAC Report and Recommendations to the 
Secretary, April 1, 1985 , Appendix A, at 4. 

l^^Soclal Security Act § 1886(d) (5) (A) (i ) , 42 U.S.C. § 1395ww(d) (5) (A) (1 ) 
(1982 ed., Supp. II); 42 C.F.R. § 412.80 (1986). See Preamble to Interim Final 
Rule, 48 Fed. Reg. at 39,778 (1983). 

^"^The hospital-specific component is based on the hospital's costs as 
determined in its base year under the prospective payment system, i.e., FY 1982. 
Social Security Act §§ 1886(b)(3)(A) and 1886(d)(1), 42 U.S.C. §§ 1395ww(b) (3) (A) 
and 1395ww(d)(l) (1982 ed., Supp. II); 42 C.F.R. §§ 412. 71-. 73 (1986). See 
Preamble to Interim Final Rule, 48 Fed. Reg. at 39,772-775 (1983). It is 
standardized to remove the effect of the hospital's case mix and adjusted to 
account for inflation, outlier payments and a factor that will assure "budget 
neutrality" of the prospective payment system in FY 1984 and FY 1985. Social 
Security Act § 1886(d)(1)(A); 42 U.S.C. § 1395ww(d) (1 ) (A) (1982 ed., Supp. II); 
42 C.F.R. § 412.73 (1986). See Preamble to Interim Final Rule, 45 Fed. Reg. at 
39,772-775 (1983). See note 163 infra and accompanying text. During the 
Liu:.. on period, the proportion of the hospital-specific component declined 
while the federal component increased. Social Security Act § 1886(d), 42 U.S.C. 
§ 1395ww(d) (1982 ed . , Supp. II); 42 C.F.R. § 412.70 (1986). 



376 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

"federal" component /* ^ ^ Howf-ver. in FY 1987, the next fiscal year, the 
stanilnrdlzed amount will be based only on the federal component and there wJ ) 1 be 
one price per case for all urban hospitals and one price per case for all rural 
hospitals. '*^2 

The federal component is calculated according to a formula with five steps: 
(1) removing costs that are not included Jn the prospeci ive payment rate; (2) 
updating for inflation and other changes that affect hospital performance; (3) 
"standardizing" the costs per case to remove costs attributable to explainable 
differences between hospitals, i.e., area wage rates, teaching status and case 
mix; (4) aggregating and averaging the standardized amount for all urban and all 
rural hospitals; and (5) making other adjustments required by law, e.g.. the 
adjustments to assure budget neutrality*"' and reflect payments for outlier 
cases.'"'* The final standardized amount is then divided into components 
reflecting labor and nonlabor costs and the labor component is adjusted to 
reflect the wage level for the area in which the individual hospital is 
located. ^^^ 

Not all hospital costs are included in the ORG prices due to congressional 
uncertainty about how to estimate these costs fairly and account for the large 



^' 



^^^During the transition period from FY 1984 to FY 1986, the federal 
component included a regional as well as national average with the proportion of 
the federal component based on the national average Increasing over the years. 
Social Security Act § 18R6(d) (2) (n) , 42 U.S.C. § 1395ww(d) (2) (D) (1982 ed . , Supp. 
II); See Preamble to Interim Final Rule, 48 Fed. Reg. at 39,766 (1983). 

l^^cjo cial Security Act § 1886(d)(l)(A)(iii), 42 U.S.C. § 
J395ww(d)(l)(A)(iii ) (1982 ed . , Supp. IT); 42 C.F.R. § 412. 70 (1986). 

^"^The "budget neutrality" adjustment is designed to comply with the 
statutory directive that the prospective payment system not pay hopsitals more in 
FY 1984 and FY 1985 than would have been paid under the retrospective cost 
reimbursement system and the TEFRA limits. Social Security Act § 1886(e)(1)(B); 
42 U.S.C. § 1395ww(e)(l)(B) (1982 ed . , Supp. II). The adjustment for outlier 
payments to individual hospitals is designed to account for payments for outlier 
cases and thus ensure that budget neutrality is maintained. Social Security Act 
§§ 188R(d)(2)(E) and (F) and (3)(B) and (C); 42 U.S.C. § 1395ww(d) (2) (E) and (F) 
and (3)(B) and (C) (1982 ed., Supp. II). 

^^'^Social Security Act § 1886(d)(2), 42 U.S.C. § 1395ww(d) (2) (1982 ed . , 
Supp. II); 42 C.F.R. § 412.73 (1986). See Preamble to Interim Final Rule, 48 
Fed. Reg. at 39,763-766 (1983); Technical Appendixes to the ProPAC Report and 
Recommendations to the Secretary, April, 1985 , Appendix A, at 5. 

^^^Social Security Act § 1886(d)(2)(H), 42 U.S.C. § 1395ww(d ) (2 ) (H) (1982 
ed., Supp. II); 42 C.F.R. § 412.63(g). See Preamble to Interim Final Rule, 48 
Fed. Reg. at 39,767-768 (1983); Technical Appendixes to the ProPAC Report and 
Recommendations to the Secretary, April, 1985 , Appendix A, at 7. 



MEDICARE APPEALS SYSTEM 377 

variations in these costs among hospitals. Specifically, the costs excluded are 
capital costs at least until 1987.^^^ The Secretary has just proposed 
incorporating capital costs into the DRfi prices. ^'^'^ The budget legislation 
currently before the Congress also contains proposals for incorporating capital 
costs into the prospective payment rdlc;:./'^^ In addJHon, direct costs of 
medical education are reimbursed separately . ^^^ The prospective payment system 
also pays an allowance for teaching activities calculated on the basis of the 
number of the hospital's interns and residents.^ " 

The fiscal intermediaries conduct the i)ayment transaction under the 
prospective payment system. Spec j f icai ly, the hospital's fiscal intermediary 
assigns the DRG to a particular case on the basis of information suppli(!d on the 
uniform hospital bill that the hospital submits for that case. Using the 
hospital's standardized amount and multiplying it by the DRfi weight, the fiscal 
intermediary sets the final price per case. At the end of the year, the fiscal 
intermediary tallies the total paid for all Medicare cases as well as the 
hospital's capital and educationaJ costs to determine the amount of final payment 
for that fiscal y(?ar. Then the fiscal intermediary issues a notice of program 
reimbursement (NPR) . 

Updati ng Payment Rates . The Social Security Amendments of 1983 require that 
the Secretary update payments to hospitals under the prospective payment system 



l^^Social Security Act § 1886(a)(4)(C), 42 U.S.C. § 1395ww(a) (4 ) (C) (1982 
ed., Supp. II). See Preamble to Interim Final Rule, 48 Fed. Reg. at 39,776 
(1983) . 

Capital costs are reimbursed separately according to retroac;tive cost 
reimbursement principles. In the Social Security Amendments of 1983, Congress 
stated its intent to include capital costs in DRG prices by October 1986 and 
directed the Secretary to report to Congress by October 1984 on proposals for 
incorporating capital costs into DRG prices. Social Security Amendments of 1983 
§ 603(a)(1) (1983). See Department of Health and Human Services, Report to 
Congress, Hospital Capital Expenses: A Medicare Payment Strategy for the Fu ture ( 1986) . 

^^'^Interim Final Rule, 51 Fed. Reg. 19,970; 19,974-88 (1986). See also 
Report to Congress, Hospital Capital Expenses , supra note 166. 

^^^See H.R. 5300, § 10203, 99th Cong., 2d Sess . (1986); S. 2706, § 602, 99th 
Cong., 2d Sess. (1986). See also H.R. Rep. No. 727, 99th Cong.. 2d Sess. 428-430 
(1986); S. Rep. No. 348, 99th Cong., 2d Sess. 139-140 (1986). 

l^^Social Security Act § 1886 (a)(4), 42 U.S.C. § 1395ww (a)(4) (1982 ed., 
Supp. II). See Preamble to Interim Final Rule, 48 Fed. Reg. at 39,777 (1983). 

I'^^Social Security Act § 1886(d)(5)(B), 42 U.S.C. § 1395ww(d) (5 ) (B) (1982 
ed., Supp. II); 42 C.F.R. § 405.421 (1986). See Preamble to Interim Final Rule, 
48 Fed. Reg. at 39,778 (1983). 



378 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

.iiuuially through the informal nilemaking process.*"' Specifically, updating 
hospital payment rates Involves (1) adjusting the standardized amount to reflect 
inflation, hospital productivity, new technology and other factors, and (2) 
readjusting the DRGs to reflect changes in resource consumption due to new 
technology and other factors.''^ In updating the standardized amount, the 
Secretary may not exceed inflation plus 0.25%^'^ and must take into account 
changes in the hospital "market basket," I.e., the goods and services hospitals 
purchase to care for Medicare beneficiaries,^''* hospital productivity, 
technological and scientific advances, quality of health care and the "long term 
eff<!Ct iveness" of the Medicare program.^'' The Secretary must adjust the DRG 
classification and weighting factors for FY 1986 and at least once every four 
years thereafter "to reflect changes in treatment patterns, technolojgv and other 
factors which may change the relative use of hospital resources."^'" Updating 
hospital payment rates is a highly technical process Involving sophisticated 
economic and statistical analysis and necessarily requires assumptions about the 
health care system and reliance on data that are, in many cases, ultimately based 
on intuitive prof e.ssional judgments. 

Congress was acutely aware of this character of the rate setting process and 
also of the fact that the initial payment rates were imprecise and would need 
modification as data on actual experience under the system was generated and, 
further, that HHS was under tremendous pressure to reduce Medicare budgetary 



^''^Social Security Act § 1886(e)(5)(A), 42 U.S.C. § 1395ww(e) (5 ) (A) (1982 
ed . , Supp. II). 

^''^The Social Security Amendments of 1983 § 601(e), codified as amended in , 
Social Security Act § 1886(d)(2)(B) and (3)(A), 42 U.S.C. § 1395(d)(2)(B) and 
(3)(A) (1982 ed. , Supp. II) . 

^''^Social Security Act § 1886(d) (2 ) (B) , 42 U.S.C. § 1395(d)(2)(B) (1982 ed . , 
Supp. II). 

Initially, the limit was inflation plus 1%, but Congress tightened this 
formula in the Deficit Reduction Act of 1984. Deficit Reduction Act of 1984 
§ 2310, amending . Social Security Act § 1886(b)(3)(B), 42 U.S.C. § 1395(b)(3)(B) 
(1982 ed. , Supp. II) . 

^'^'^Social Security Act § 1886(b)(3)(B), 42 U.S.C. § 1395ww(b) (3) (B) (1982 
ed., Supp. II). See Preamble to Interim Final Rule, 48 Fed. Reg. at 39,776 (1983). 

^''^Social Security Act § 1886(d) (4 ) (D) . 42 U.S.C. § 1395ww(d) (4 ) (D) (1982 
ed., Supp. II). See Preamble to Interim Final Rule, 48 Fed. Reg. at 39,776 (1983). 

^'^'^Social Security Act § 1886(d)(4)(C), 42 U.S.C. § 1395ww(d) (4 ) (C) (1982 
ed., Supp. II). See Preamble to Interim Final Rule, 48 Fed. Reg. at 39,776 
(1983) . 



\ 



MEDICARE APPEALS SYSTEM 379 

expenditures.^'^'' Thus, Congress created the Prospective Payment Assessment 
Commission (ProPAC) to participate in the process of setting and updating the 
hospital payment rates in a substantive and public fashion. ^''^ This commission, 
composed of seventeen experts on health care appointed by the Director of the 
congressional Office of Technology Assessment (OTA).^''^ must by statute include 
representatives of the medical profession, hospital industry, and health 
manufacturers as well as business, labor, health insurance programs and the 
elderly. -^^^ ProPAC has two statutory responsibilities: (1) to make annual 
recommendations to the Secretary on the appropriate percentage change in the 
Medicare payments for hospital services, i.e., the "update factor"; and (2) to 
make recommendations to the vSecretary on necessary changes in the DRGs , including 
advisability of establishing new DRGs, modifying existing DRGs and changing the 
relative weights of the DRGs.^^^ 

To assure that ProPAC has the contemplated influence in setting hospital 
payment rates. Congress mandated a rather formal schedule of public 
communications between ProPAC and HFIS on the annual updating of hospital payment 
rates. ProPAC submits (1) an April report to the Secretary on adjustments to the 
prospective payment system; (2) a February report to Congress on the prospective 
payment system and the American health care system; and (3) a November report to 
Congress on the Secretary's regulations updating hospital payment rates for the 
upcoming fiscal year.^^^ must publish the proposed rule on updating hospital 



^'^'^ See Senat e Fi nance Comm. Hearings on Hospital Prospective Payment System; 
House Ways and Means Comm . Hearings on Hospital Prospective Payment System . 

^''^Social Security Amendments of 1983 § 601(e), codified as amended In , 
Social Security Act § 1886(e)(2), 42 U.S.C. § 1395ww(e)(2) (1982 ed., Supp. II). 
See H.R. Rep. No. 911, 98th Cong., 2d Sess. 140 (1984). 

^'^^Social Security Act § 1886(e)(2) and (6), 42 U.S.C. § 1395ww(e)(2) and 
(6) (1982 ed. , Supp. II) . 

l^^Social Security Act § 1886(e) (B), 42 U.S.C. § 1395ww(e) (2 ) (6) (B) (1982 
ed., Supp. II). 

"•^^Social Security Act § 1886(e)(3) and (d)(4)(D), 42 U.S.C. § 1395ww(e)(3) 
and (d)(4)(D) (1982 ed . , Supp. II). See Prospective Payment Assessment 

Commission, R eport and Recommendat io ns to the S ecretary , U.S . Depar tment of 

Health and Human Services, April 1, 198 5, at 3 [hereinafter cited as " ProPAC 
Report and Recommendations to the Secretary, April 1, 1985 " ] . 

1^2j5j,(.ijji Security Act § 1886(d)(4)(D) and (e)(3), 42 U.S.C. § 
1395ww(d)(4)(D) and (e)(3) (1982 ed . , Supp. JI). See H.R. Rep. No. 911, 98th 
Cong., 1st Sess. 140 (1984); Technical Appendixes to the ProP A C Report and 
Recommendations to the Secretary, April 1, 1985, Appendix A, at 11. 



380 



ADMINISTRATFVE CONFERENCE OF THE UNITED STATES 



payment rates 



183 



HFul, in that rultr, must inrlude ProPAC's April 



recommendnt lorjs . ' ■* PtdPAC comments on these proposed ruJes In the regular 

rommettt process. ^^ After publication of the final rule by September 1 , ^^^ 

ProPAC reports to Congress aiuily/ing the Secretary's updating of the payment 

rates in the final rule. ^ 

To date, HHS has not adopted many of the recommendations of ProPAC on the 

methodology to use for updating hospital payment rates or recalibrating DRGs but, 

rather, has selected other methodologies which have resulted in lower payment 

1 flfl 
rates. There have been some areas of agreement. ProPAC recommended that the 

Secretary Include capital costs in the DRG prices beginning in FY 1987, a 

recommendation that HHS has accepted in concept but not according to the same 



^^^Social Security Act § 1886(o)(4) and (5) (A), U.S.C. § 1395ww(E)(4) and 
(5) (A) (1982 ed. , Supp. II) . 



184 



Social Security Act § 1886(e)(5), 42 U.S.C. § 1395ww(e)(5) (1982 ed . , 



Supp. II). 
1 85 

* "^Although not statutorily mandated, ProPAC has submitted comments in the 
informal rule making process. Propective Payment Assessment Commission, 1986 
Adjustme n ts to the Medicare Prospective Payment System: Report to the Congress, 
Novembei- 1985 , at 45-64 (comments on Proposed Rule, 50 Fed. Reg. 24,366 (1985)) 
(hereinafter cited as " 1986 Adjustments to the Medicare Prospective Payment 
System: ProPAC Report to the Congress, November 1985 "]. See also letter from 
Stuart H. Altman, Ph.D., Chairman of the Prospective Payment Assessment 
Commission, to William L. Roper, M.D., Administrator of the Health Care Financing 
Administration (July 2, 1986) (comments of the Prospective Payment Assessment 
Commission on the Notice of Proposed Rulemaking of June 3, 1986, Concerning 
Fiscal Year 1987 Changes in the Inpatient Hospital Prospective Payment System). 



^^^Social Security Act § 1886(e)(5)(B), 42 U.S.C. § 1395ww(e) (5) (B) (1982 
ed. , Supp. II ) . 

^^"^Social Security Act § 1886(d) (4) (0) , 42 U.S.C. § 1395ww(d ) (4 ) (D) (1982 
ed., Supp. II). See 1986 Adjustments to the Medicare Propsective Payment System: 
Pr oPAC Report to the Congress, November 1985 . 



'^^Regarding the update of FY 1986 rates: see ProPAC Report and 
Recommendations to the Secretary, April 1, 1985 ; Preamble to Proposed Rule, 50 
Fed. Reg. 24,366 (1985); 1986 Adjustments to the Medicare Prospective Payment 
System: Report to the Congress, November 1985 . For the update of FY 1987 rates: 
see Prospective Payment Assessment Commission, Report and Recommendations to the 
Secretary, U.S. Department of Health and Human Services, April 1, 1986 
[hereinafter cited as " ProPAC Report and Recommendations to the Secretary, April 
1. 1986 "]; Preamble to Proposed Rule, 51 Fed. Reg. 19,970 (1986). 



MEDICARE APPEALS SYSTEM 381 

methodology as ProPAC proposed . ^^^^* Congress has overridden HHS's recommendations 
for updating hospital payment rates for prior years. ^^ The House Budget 
Committee has indicated a concern that Congress may again have to act to set the 
update factor for hospital payment rates under the prospective payment system. ^^^ 

Ensuring Quality of Care . In the Social Security Amendments of 1983, 
Congress gave PROs the responsibility of monitoring hospital performance under 
the prospective payment system and specifically charged PROs with reviewing and 
determining for payment purposes "the validity of diagnostic information provided 
by [a] hospital, the completeness, adequacy and quality of care provided, the 
appropriateness of admissions and discharges, and the appropriateness of care for 
which additional payments are sought. "^^^ Congress also accorded HHS authority 
to impose sanctions on hospitals that exhibit inappropriate admissions and 
discharge practices . ^^'^ 

As a condition of payment, a hospital must have an agreement with the 
designated PRO for its area that enables the PRO to conduct the requisite 
reviews. ^^"^ Specifically, PROs review the admission and discharge patterns of 
hospitals, the use of certain procedures, admissions for certain types of 
treatment and all outlier cases for which hospitals seek additional payment. ^^^ 



l^^Preamble to Proposed Rule, 51 Fed. Reg. at 19,983-85 (1986). See P roPAC 
Report and Recommendations to the Secretary, April 1, 1986 , at 5-6; 32-36; 
Technical Appendixes to the ProPAC Report and Recommendations to the Secretary, 
April 1, 1986 , Appendix B, at 40-56. 

l^^See Emergency Extension Act of 1985, Pub. L. No. 99-107, § 5, amending 
Social Security Act § 1886(b)(3)(B), 42 U.S.C. § 1395(b)(3)(B) (1982 ed . , Supp. 
11); Consolidated Omnibus Budget Reconciliation Act of 1986 § 9101, amending 
Emergency Extension Act of 1985 § 5(c). 

^^^See H.R. Rep. No. 727, 99th Cong., 2d Sess. 427 (1986). 

^^^Social Security Amendments of 1983 § 602(f)(1) codified as amended in , 
Social Security Act § 1866(a)(1)(F); 42 U.S.C. § 1395cc(a) ( 1 ) (F) (1982 ed., Supp. 
II). See H.R. Rep. No. 47, 98th Cong., 1st Sess. 197 (1983). 

193social Security Act § 1886(f) (22); 42 U.S.C. §1395ww(f ) (2) (1982 ed., 
Supp. IT); 42 C.F.R. §§ 474. 30-. 58 (1986). 

^^"^Social Security Act § 1866(a)(1)(F), 42 U.S.C. § 1395cc(a) (1 ) (F) (1982 
ed., Supp. II); 42 C.F.R. § 412.44 (1986). 

'^^The review responsibilities of PRO's are outlined in the regulations, 42 
C.F.R. § 412.44 (1986), and spelled out even more specifically in the scope of 
work of the request for proposal for PRO contracts and in the contracts 
themselves. See notes 129-130 supra and notes 410-416 infra and accompanying text. 

1 



382 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

A PRO must also review any cases In which a hospital advises a beneficiary that 
Medicare does not cover certain services and the hospital will accordingly charge 
the beneficiary for such services. ^ Congress has given considerable attention 
to the performance of PROs in conducting these reviews as well as made and 
considered changes In review requirements to Improve reviews of the quality of 
hospital care.^^^ 

C . Ramifications for the American Health Care System and Med i care Appea ls 

The prospective payment system has had an enormous Impact on the American 
health care system and also the Medicare appeals system. First and very 
Important is the fact that hospitals have done very well under the prospective 
payment system. Indeed, in 1984, the hospital industry made record profits -- an 
Increase of 27.6* from 1983.^^^ These profits have been so great that Congress 
and the HHS Inspector General have launched inquiries and have made 
recommendations for changes. ^^^ In addition, the prospective payment system has 
been quite successful in addressing the hospital cost problem and in curbing the 
rate of inflation in hospital costs. Tn 1984, the growth in hospital spending 
was the slowest in 19 years; and the 1984 Medicare inflation rate for hospital 
costs was 9.6% compared to the average annual rate of 16.7% between 1977 and 
1983 200 jhis record profitability for the hospital industry as well as the 
demonstrated success of the prospective payment system in meeting its goals is 
critically important to keep In mind when evaluating the appeals issues that 
hospitals have raised. 

The prospective payment system and other regulatory changes have also had a 
critical Impact on the American health care system. In 1984, the number of 
hospital admissions of the elderly declined for the first time since 1965, 
average length of stay continued to decline, and data suggest that hospitals were 



1^^42 C.F.R. § 412.44 (1986). 

^^'See notes 135-137 supra and accompanying text. 

^^^ National Health Expenditures, 1984 at 13. See also Prospective Payment 
Assessment Commission, Medicare Prospective Payment and the American Health Care 
Sy.stem: Report to the Congress , 51 (1986) [hereinafter cited as " ProPAC Report 
on the American Health Care System " ] . 

199office of the Inspector General, Department of Health and Human Services. 
Financial Impact of the Prospective Payment System on Medicare Participating 
Hospitals-1984 ; Hospital Profits Under PPS: Hearing Before the Subcomm. on 
Health of the Senate Finance Comm. , 99th Cong., 2d Sess. (1986). 

200 propy^Q Report on American Health Care System at 19-20; See also National 
Health Expenditures, 1984 . 



MEDICARE APPEALS SYSTEM 383 

taking care of a sicker group of patients than ever before. ^01 Tmplementation of 
the prospective payment system has encouraged hospitals and physicians to treat 
more Medicare beneficiaries outside the hospital, and data show that there was 
greater utilization of outpatient services in 1984 compared to earlier years. ^^^ 
Many patients are discharged from hospitals sicker and are in greater need of 
skilled nursing and home health services after discharge . ^"^ There has been 
increased utilization of Part B services, and these Part B services are more 
sophisticated and consequently more expensive than in previous years. ^^"^ 

With these changes in the utilization patterns for health care resources has 
come an increased number of appeals about disputes over coverage and payment on 
home health services . ^^"^ There has also been an increase in the number of 
appeals of Part B coverage and payment determinations as well as the amount of 
money involved in Part B appeals. ''^^ Specifically, there was a 31% increase in 
request for review determinations for Part B claims between 1983 and 1984 --- the 
first year of the prospective payment system.'" 



^^^ ProPAC Report on American Health Care System , at 19-20. See also Quality 
of Care Under Medicare's Prospective Payment System: Hearings Before the Senate 
Special Comm. on Ag ing, 99th Cong., 1st Sess. (1985) [hereinafter cited as 
" Senate Special Comm . on Aging Hearings on Quality of Care Under Medicare's 
Prospective Payment System " ] . 

202^ . Government Accounting Office, Information Requirements for 
Evaluating the Impacts of Medicare Prospective Payment on Post-Hospital Long- 
Term-Care Services: Preliminary Report (PEMD-85-8, Feb. 21, 1985). 

^^^ ProPAC Report on the American Health Care System at 60-61 ; Government 
Accounting Office, Information Requirements for Evaluating the Impacts of 
Medicare Prospective Payment on Post-Hospital Long-Term-Care Services: 
Preliminary Report (PEMD-85-8, Feb. 21, 1985); Senate Special Comm. on Aging, 
Hearings on Quality of Care Under Medicare's Prospective Payment System , at 118. 

'-^'*See Congressional Research Service, Medicare Appeals Background Paper 
(Oct. 1985), reprinted in , Medicare Appeals Provisions: Hearings on S. 1158 
[sic] Before the Subcomm. on Health of the Senate Comm. on Finance , 99th Cong. , 
1st Sess. 2 (1985) [hereinafter cited as " Senate Finance Comm. Hearings on 
Medicare Appeals Provisions "] . 



205 



206 



207 



Id 



Id 



Id. 



384 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 
IIHAF'TKR J IT: THH MKDICARE APPEALS SYSTEM 

The Medicare appeals systom ran bost be characterized as a patchwork*^ - 
with a large number of indf^|)pndent appeal processes to address a multitude of 
diverse issues. This diversity is in large part due to the fact that Meflicare is 
an enormous program serving 30 million beneficiaries spread throughout the United 
States and its territories as well as a decentralized program with numerous 
public and private organizations -- i.e.. HCFA, fiscal intermediaries, carriers. 
PHOs. hospitals and other institutions and physicians -■ executing various 
administrative and service responsibilities under the program. This report is 
coricerntrd only with the appeals processes that are available for Medicarf* 
beneficiaries and providers to appeal disputes over coverage of and payment for 
Medicare benefits. Tonsequent ly , this chapter describes only these appeals 
processes . 

A . Misto r i ca 1 _I )f ^ v^e 1 opment of the Medicare Appeals System 

1 . The Original Appeals Sy s tem . 

In designing the Medicare program in 1965, Congress determined that 
administrative review by HEW and judicial review would only be accorded to 
beneficiaries having disputes as to entitlement to benefits or the amount of 
benefits under Part A over a certain sum.^^^ The Metlicare statute provided 
further that § 205(b)2^" and § 205(g)^^^ of the Social Security Act. which 
governed administrative and judicial review for other appeals under the Social 
Security Act. woulfl apply to these Medicare appeals. ^^^ 

Congress did not authorize comparable administrative or judicial revie^w for 
provider payment disputes under Part A nor offer any rationale for this decision 



^^^Medi ca if! Beneficiary Appeals P roc ess in Tec hn ica l Appendixes to th e 
ProPAC Report and Recommendations to the Secretary, April 5, 1986 , Appendix C, at 
163. 

^^^Social Security Amendments of 1965, § 102(a), codif ied as amended in , 
Social Security Act § 1869(b), 42 U.S.C. § 1395ff(b) (1982 ed.,"Supp. II). The 
House; bill proposed an amount in controversy for administrative and judicial 
review of $1,000 while the Senate amendment proposed a $100 threshold. The 
conference committee determined to allow administrative appeals for amounts In 
controversy exceeding $100 and judicial review for amounts of $1,000 and above. 
H.R. Rep. No. 682, 89th Cong., 2d Sess. 46 (1966). 

2i0socia] Security Act § 205(b), 42 U.S.C. § 405(b) (1982 ed . , Supp. II). 

21'social Security Act § 205(g), 42 U.S.C. § 405(g) (1982 ed.. Supp. II). 

^^^Social Security Amendments of 1965. § 102(a). cod ifie d a s amended in. 
Social Security Act § 1869(b), 42 U.S.C. § 1395ff(b) (1982 ed . , Supp. II). 



MEDICARE APPEALS SYSTEM 



385 



in the legislative history. Pursuant to § 1872 of the Social Security Act, § 
2n5(h) applied to provider appeals. ^^ Thus, in the early years of the Medicare 
program, fiscal intermediaries heard all appeals of provider payment disputes and 
no subsequent review by the Secretary of HEW or the federal courts was available. 
Congress also did not authorize administrative or Judicial review of 
coverage and payment determinations under Part B for either beneficiaries or 
providers. Rather, Congress simply provided that carriers, as part of their 
responsibilities under their contracts with HEW, would conduct fair hearings for 
beneficiaries in disputes over the carriers' coverage and payment 
determinations.^^'* According to the Senate Finance Committee, this approach was 
justified because under Part B "claims will probably be for substantially smaller 
amounts than under Part A.'"^^"^ As with claims of providers under Part A, Part B 
claimants are also subject to § 205(h) with its bar to federal question 
jurisdiction by virtue of § 1872 of the Social Security Act.^^^ 

2 . Early Concerns and Prob lems 

Several problems emerged with the appeals process shortly after the Medicare 
program got under way which Congress specifically addressed in the Social 
Security Amendments of 1972. Many other concerns, i.e., the statutory preclusion 
of administrative and judicial review of Part B claims, did not precipitate 
congressional action and, in so far as they persist today, will be discussed 
later in this report. The two problems which Congress did address in the Social 
Security Amendments of 1972 are discussed below. 



^^^Social Security Amendments of ige.'S, § 102(a), codified as amended in , 
Social Security Act § 1872, 42 U.S.C. § 139511 (1982 ed . , Supp. II). Section 
205(h) provides: 

The findings and decision of the Secretary after a hearing shall be 
binding upon all individuals who were parties to such hearing. No 
findings of fact or decision of the Secretary shall be reviewed by any 
person, tribunal, or governmental agency except as herein provided. No 
action against the United States, the Secretary, or any officer or 
employee thereof shall be brought under section 1331 or 1346 of Title 
28 to recover on any claim arising under this subchapter. Social 
Security Act § 205(h), 42 U.S.C. § 405(h) (1982 ed . , Supp. II). 

2^'^Social Security Amendments of 1905 § 102(a), codified as amended in . 
Social Security Act § 1842(c)(7), 42 U.S.C. § 1395u(c)(7) (1982 ed., Supp. II). 
This right to a fair hearing has been extended to providers who accept assignment 
of a beneficiary's Part B benefits. See note 304 infra and accompanying text. 



21^S. Rep. No. 404, 89th Cong., 2d Sess . 55 (1965) 



21^Social Security Amendments of 1965, § 102(a), codified as amended In , 
Social Security Act § 1872, 42 U.S.C. § 139511 (1982 ed., Supp. II). 



386 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

The Provider Re J wbursenient Review Board (PRRB). Providers, having 
Hub.Htantia] and complex disputes with fiscal intermediaries and the Medicare 
program over payment under the cost reimbursement system, objected to the 
informality of intermediary hearing proceedings anri the lacl< oi administrative or 
Judicial review for the Intermediary's final paymerit determination. ' ' In 1972, 
a federal district court. in Coral Gables Convalescent Home, Inc. v. 
RU-hardson . ^ ^ ^ ruled that extant i nterme (Jiary hearing procedures with no appeal 
to the Secretary and no guidance through MEW regulations violated providers' 
right to procedural due process. This court ordered the Secretary to promulgate 
any necessary regulations to correct these constitutional deficiencies, and the 
Secretary promulgated regulations accordingly . ^^^ 

Providers were particularly dissatisfied with the preclusion of judicial 
review of intermediary decisions in payment disputes. Some courts, compelled by 
the harshness of this statutory preclusion, did find other grf)unds for federal 
question Jurisdiction . '^^^ However, most courts refuser! to acknowledge federal 
Jurisdiction in Medicare payment cases'^ especially after the Supreme Court's 
1972 decision, Weinberger v. Salfi ,^^^ r:larifying that § 205(h) 's bar to federal 



2.11*1 Homer & PlatLfMi, Medica re Provider Reimbursement Dis putes: An 

A nalysis of the Administrative Hearing Procedures , G3 Geo. L.J. 107 (1974). This 
article was written by promin(;nt provith^r lawyc^rs and identifies provider 
concerns with these administrative hearing procedures. 

2^^340 F. Supp. 646 (S.l). Fla. 1972). 

2^^See 37 Fed. Reg. 10,724 (codified at 20 C.F.H. §§ 405.490-.499 (1974)). 

^^" See, e.g. , Adams Nursing Home of Williamston, Inc. v. Mathews, 548 F.2d 
1077 (1st Cir. 1977); Rothman v. Hospital Service of Southern California, 510 
F.2d 956 (9th Cir. 1975); Kingsbrook Jewish Medical Center v. Richardson, 486 
F.2d 663 (2d Cir. 1973); Aquavella v. Mathews, 437 F.2d 397 (2d Cir. 1971). 

^^^ See , e.g. , Faith Hospital Association v. Blue Cross Hospital Service, 
Inc., 537 F.2d 294 (8th Cir. 1976), cert, denied , 429 U.S. 977 (1976); St. Louis 
University v. Blue Cross Hospital Service, Inc., 537 F.2d 283 (8th Cir. 1976), 
cert, denied , 429 U.S. 977 (1976); South Windsor Convalescent Home, Inc. v. 
Mathews, 541 F.2d 910 (2d cir. 1976); cf^. MacDonald Foundation, Inc. v. Mathews. 
571 F.2d 328 (5th Cir. 1978), vacating, dism issing and transferring on 
Jurisdi ctional grounds . 554 F.2d 714 (5th Cir. 1977), d enying rehearing of , 534 
F.2d 633 (5th Cir. 1976), cert denied , 739 U.S. 893 (1978). 

222422 U.S. 749 (1975) . 



MEDICARE APPEALS SYSTEM 



387 



question jurisdiction applied to all payment claims under the Social Security Act 
even when the rlaimant raised an associated constitutional issue. ^^^ 

Responding to these provider concerns and frankly stating that Congress had 
overlooked the resolution of provider disputes in originally designing the 
Medicare appeals system, ^24 Congress established the Provider Reimbursement 
Review Board (PRRB) in the Social Security Amendments of 1972 to adjudicate 
payment disputes arising between providers and intermediaries in cost reporting 
periods ending after June 30, 1973.^^^ Congress also authorized judicial review 
of PRRB decisions. ^^^ 

Waiver of Liability . Beneficiaries had several concerns about coverage 
determinations under Part A and Part B in the early years of the Medicare 
program. ^^^ The most serious problem resulted from HEW policies, precipitated by 
escalating costs and high utilization rates, interpreting statutory definitions 
of benefits more strictly and then denying coverage of and payment for services 
already provided on a retroactive basis. ^^° This was particularly a problem with 
skilled nursing benefits. In 1968, the Social Security Administration instructed 
fiscal intermediaries and carriers to define covered "skilled nursing services" 
more narrowly and proscribed "custodial care" more broadly to reduce utilization 
and thus cost of skilled nursing home services for Medicare beneficiaries. ^^^ 
Following these policy changes, fiscal intermediaries denied a large volume of 
skilled nursing home services on a retroactive basis, causing severe financial 



OO'i 

'■'■^See Comment, Federal Question .Jurisdiction Over Medicare Provider Appeals 
After Weinberger v. Salfi: Toward a Principled Construction of the Statutory Bar , 
65 Va. L. Rev. 1383 (1979). 



224s. Rep. No. 1230, 92d Cong., 2d Sess. 248 (1972). 
supra note 217, at 119. 



See Homer & Flatten, 



225social Security Amendments of 1972, § 243(a), 
Social Security Act § 1878, 42 II.S.C. § 1395oo (1982 ed 



codified as amended in , 
, Supp. II). 



226social Security Amendments of 1972, § 243(a), codified as amended in , 
Social Security Act § 1878(a), 42 U.S.C. § 1395oo(a) (1982 ed., Supp. II). 

22 'See Butler, Advocate's Guide to the Medicare Program , 8 Clearinghouse 
Rev. 831 (1974); Butler, Medicare Appeal Procedures: A Constitutional Analysis , 
70 Nw . L. Rev. ' 139 (1975). These articles, by a recognized advocate of 
beneficiary rights, review the objections to the early Medicare appeals 
procedures from the beneficiary's perspective. 



228 



Butler, An Advocates Guide , s upra note 227, at 836-837 



229 



Part A Intermediary Letter No. 328 (June 1968); 20 C.F.R. § 405,125-. 127 
(1974). See Butler, An Advocate's Guide, supra note 227, at 837. 



388 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

hardslilp for benof icliir J es who thought Medicare would pay for tholr care and for 

providers which furnished expensive servlc-es with the expectation of beioK 
paid 230 

Congress, concerned about these retroac:tive denials and their implications 
for beneficiaries, specificdlJy sought to mitigate the harsh and unfair results 
of these i)racti(:es. Tn the Social Security Amendments of 1972, Congress 
authorized the Medicare program to waive the liability of beneficiaries or 
providers for any services provifled that were subsequently determined not to be 
covered Medicare benefits according to medical criteria, i.e.. not medically 
necessary or constituting custodial care, if they did not know or had no reason 
to know that the services were not covered. *^^ 

B . The Present Medicare Appeals System 

Analytically, it is useful to think of the present Medicare appeals system 
for coverage and payment disputes as a tree with the first division separating 
appeals procedures for Part A from those for Part B. A diagram of the appeals 
processes for disputes of beneficiaries and providers over coverage of and 
payment for Medicare benefits is included in Appendix B. For Part A, the major 
branch divides into two branches: one for beneficiary appeals of coverage 
determinat lons232 gp^j Qpp f^j^ provider appeals of payment determinations. The 
Part B branch does not divide as there is a combined process for beneficiary 
appeals of both coverage and payment determinations with providers having appeal 
rlgfits only if they accept assignment of Part B benefits from beneficiaries . ^33 
Included in the branch for beneficiary appeals under both Part A and Part B is an 
appeals process to determine whether the Medicare program should waive the 



230 



Id 



23isocial Security Amendments of 1972 § 213(a), codified as amended in . 
Social Security Act § 1879, 42 U.S.C. § 1395pp (1982 ed . , Supp. II). See notes 
323-340 infra and accompanying text. 

232Benef iclaries may appeal adverse eligibility determinations under Part A 
and Part B. Social Security Act § 1869, 42 U.S.C. § 1395ff (1982 ed . . Supp. II). 
Appeals may be taken to an Administrative Law .Judge in the Social Security 
Administration and, ultimately, to federal court and no specified amount in 
controversy is required. Providers under Part A may also appeal adverse 
decisions regarding their eligibility to participate in the Medicare program. 
Social Security Act § 1869, 42 U.S.C. § 1395ff (1982 ed . , Supp. II). 42 C.F.R. § 
405. 1501-. 1595 (1986) . 

See note 304 infra and accompanying text. 



MEDICARE APPEALS SYSTEM 389 

liability of the beneficiary and/or the provider for a service determined to be 
not a covered benefit under the Medicare program on medical grounds. ^^"^ 

1 . B eneficiary Appeals Under Part A 

For skilled nursing and home health services, the fiscal intermediary makes 
the initial coverage and payment determination regarding Medicare benefits 
provided a benefif;iary including whether the services are covered according to 
medical criteria, i.e., whether the services were medically necessary or 
constituted custodial care.^ Beneficiaries may obtain reconsideration of this 
initial determination from HCFA.^''" PROs , rather than fiscal intermediaries, 
make the initial determination that a hospital service is not a covered Medicare 
benefit according to medical criteria.' ' Congress has effectively delegated 
the authority to determine coverage of inpatient hospital benefits to PROs,^^^ 
although HCFA has taken the position that the PRO determination on coverage does 
not supersede HCFA's authority to enforce coverage provisions of the Social 
Security Act.'^'^*^ 

After receiving a notice of initial determination of benefits and payment, 
the first step of a beneficiary appeal of a dispute over coverage of or, less 
often, payment for Medicare benefits is reconsideration by the fiscal 
intermediary in the case of skilled nursing and home health benefits or by the 



^'^'^There are no appeal rights for any other party besides a beneficiary or 
provider affected by a HCFA coverage decision, even those coverage decisions of 
HCFA, fiscal intermediaries or carriers regarding whether to pay for new medical 
technologies and procedures. 

See note 54 supra and accompanying text. Health equipment manufacturers 
have pressed for creation of an appeals process for this type of global coverage 
decision. See Health Industry Manufacturers Association, Recommendations of the 
HJMA Product Introduction Coordination Task Force (May 29, 1986). 



23542 c.F.R. at §§ 405 . 704 (b) (11 ) and (12) (1986) 
236jd. at §§ 405.710-.717. 
^^^icl. at §§ 405.710-.7t7. 



23^See note 126-130, 193-197 supra and accompanying text 



239 



42 c.F.R. § 466.86(c) (1986) . 



390 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

PRO In the case of hospital benef i ts . '^'^^ PKOs handle all appeals of their 
initial determinations on benefit and coverage issues for beneficiaries and 
providers. ^' The reconsideration is basically a paper review at which the 
beneficiary is generally not present nor represented by counsel. In tlie PRO 
reconsideration procefhir(r the beneficiary, physician or hospital may submit 
additional information and examine the material on which the PRO based Its 
initial determination although the PRO may not disclose the record of the PRO 
deliberation or the Identity of the decision makers. ^'*^ The decision maker in 
the recons ideia t ion must be a physician who did not make the Initial 
determination. ^^^ 

The Social Sfjcurity Act § 1869(b) authtirl/.es administrative review of the 
determinations by fiscal intermediaries on coverage of benefits of $100 or above 
and judicial review of claims of $1,000 or above. '*^ Fiscal intermediaries, 



^^Osee id . §§ 405 . 710- . 717 . (fiscal intermediary reconsideration process); 
id. at §§ 473. 16. 38 (PRO reconsideration process). 

2'*lsocial Security Act §§ 1862(g) and 1154(a)(2), 42 U.S.C. §§ 1395y(g) and 
1320c-3(a)(2) (1982 ed . . Supp. 11); 42 C.F.R. §§ 466. 83-. 86 (1986). See Medicare 
Beneficiary Appeals Process i n Technical Appendixes to the ProPAC Report and 
Recommendations to the Secretary April 1, 1986 , Appendix C, at 162. 

Before making an initial denial determination or change in a DRfi 
classification, the PRO must notify the provider and the beneficiary's physician 
and allow them an opportunity to discuss the matter with the PRO's physician 
advisor. 42 C.F.R. § 466.93 (1986). Once the PRO has made a determination to 
deny coverage on medical grounds, it is required to give notice of this denial to 
the beneficiary, the attending physician, the provider and the fiscal 
intermediary. Id. at § 466.94. This notice must also advise the beneficiary of 
the available right for reconsideration by the PRO. Id. at § 466.94(c). 

^'^^id. at § 473.24. 

^'^'^Id. at § 473.28. 

^^^^social Security Act § 1869(b), 42 U.S.C. 1395ii(b) (1982 ed . , Supp. II). 
This section provides: 

Any Individual dissatisfied with any determination under subsection (a) 
as to . . . (C) the amount of benefits under part A . . . shall be 
entitled to a hearing thereon by the Secretary to the same extent as 
provided in section 205(b) and to judicial review of the Secretary's 
final decision after such hearing as is provided in section 205(g). 

id. See 42 C.F.R. § 405.704 (1986). 



MEDICARE APPEALS SYSTEM 391 

except in the case of hospital benefits, '^■-* handle appeals of disputes over 
benefits under $100. TEFRA expressly gave PROs the responsibility of haiidling 
beneficiary appeals of hospital benefit coverage determinations made according to 
medical criteria. 246 

Administrative review before an Administrative Law .Judge (AI.J) in the Social 
Security Office of Hearings and Appeals is available for beneficiary appeals 
under Fart A of $100 and above. ^'^'^ In VY 198v5, there were 3,927 requests for AL.l 
hearings for both Part A coverage determinations and some Medicare eligibility 
issues - a decline of 4% from ALJ hearing requests in FY 1984. 2**^ A beneficiary 
may appeal the final decision of the PRO in a hospital medical coverage appeal to 
an ALJ in SSA if the amount in controversy is $200 or more.^"*^ For all other 
Part A coverage issues, the requisite amount in controversy for an ALJ hearing is 
$100 or more."^^" 

The ALJ proceeding is the first opportunity for an oral hearing at which a 
beneficiary may personally appear and plead his case although an oral hearing may 
be waived. 2^^ The role of the ALJ in Part A coverage appeals, as in other Social 
Security program appeals, is that of a non-partisan examiner rather than a judge 



2'*'^See notf> 24fi i nfra and accompanying text. 

2'^^Tax Equity and Fiscal Responsibility Ar-r of 1982, §§ 142 and 143, 
codi f ied as amended i n. Social Security Act §§ 1862(g) and 1154(a)(2); 42 U.S.C. 
§§ 1395y and 1320f; 3 (1982 ed., Supp. IT). The only coverage appeals regarding 
hospital services that fiscal intermediaries now handle arc those regarding 
technical determinations of whether a service is a covered benefit under the 
statute or regulations. 42 C.F.R. § 466.86(c)(2) (1986). 

^'^'^Social Security Act §§ 1869(b) (1 ) (r) and (2), 42 U.S.C. § 1395f f (b) ( 1 ) (C) 
and (2) (1982 ed . , Supp. 11); 42 C.F.R. §§ 405.720 and 422.203-.210 (1986). 

2'^^Sor;ial Security Administration, Operation al Report of the Off ic e of 
Hearings and Appeals 28 (1985). 

^-^^Social Security Act § 1155, 42 U.S.C. § 1320c -4 (1982 ed., Supp. TI); 42 
C.F.R. § 473.10 (1986) . 

2-'5f'social Security Act § 1869(b)(2), 42 U.S.C. § 1395ff (b)(2) (1982 ed., 
Supp. II); 42 C.F.R. § 405.720. 

^^''120 C.F.R. §§ 404.944 and .948 (1986). 



392 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

in an ndvci5»dry hearing. ^^^ In these proceedings. HHS Is not represented by 
counsel and the Individual claimant may be represented by counsel If desired. ^ 
The ALJ has primary responsibility for developing the record, In contrast to 
conventional adiudicative proceedings in which counsel for the parties has this 
responsibility.^'^ There is also an expedited appeals process for cases where 
the beneficiary has claimed, and HHS agrees, that the only factor preventing a 
favorable! decision for the beneficiary is a statutory or regulatory provision 
that the beneficiary maintains is unconstitutional.^^^ 

A claimant dissatisfied with the ALJ ' s decision may request review by the 
Appeals Council of the Social Security Administration in its Office of Hearings 
and Appeals . ^'''^ The Appeals Council may also review and reverse an ALJ decision 
on its own motion. ^^ The Appeals Council may review a case if it is alleged 
that there is an abuse of discretion by the ALJ or an error of law, the record 
indicates that the decision is not supported by substantial evidence, or there is 
a broad policy or procedural issue that may affect the general public 
interest."® HCFA also may review and refer to the Appeals Council under its 
reopening provisions, any ALJ or Appeals Council decision that It believes is 
contrary to the Medicare statute and regulations. 

For skilled nursing and home health agency appeals, a beneficiary may seek 
Judicial review of a final decision of the Secretary if the amount in controversy 



252see Richardson v. Perales, 402 U.S. 389 (1971) in which the Supreme Court 
upheld the investigatory model for ALJ conduct in Social Security disability 
hearings. See also J. Mashaw, Social Security Hearings and Appeals (1978). 



25342 C.F.R. §§ 404. 1700-. 1710 (1986). 

254_id. at § 404.951. 

^SS^d. at §§ 405.718-.718e (1986). 

256j^. at § 405.724 and 20 C.F.R. § 405.967 (1986) (skilled nursing facility 
and home health agency appeals); 42 C.F.R. §§ 473.40, .46(a) (1986) (hospital 
appeals) . 

25720 C.F.R. § 404.969 (1986). 

^SS^d. at § 404.970 (1986). 

259id. at 404. 987-. 988. 42 C.F.R. § 405.750 (1986). 



MEDICARE APPEALS SYSTEM 



393 



is $1,000 or more. 



260 



For a coverage decision on hospital services decided by a 



PRO, a beneficiary may seek judicial review of a final decision of the Secretary 
If the amount in controversy is at least $2,000.^^^ To obtain judicial review 
for all Part A beneficiary coverage appeals, suit must be brought within 60 days 
In the federal district court for the judicial district in which the claimant 
resides, where the individual, institution, or agency has a principle place of 
business, or in United States District Court for the District of Columbia. ^^^ 

2. Provider Appeals Under Part A 

Provider appeals under Part A are adjudicated by the PRRB if the amount in 
controversy is $10,000 or above and by the provider's fiscal intermediary if the 
amount in controversy is between $1,000 and $10, 000. ^^^ All institutional 
providers paid under Part A, including skilled nursing facilities and home health 
agencies, can appeal to the PRRB.^""* In 19B4, approximately 1,500 appeals were 
made to the PRRB. 265 

The Social Security Amendments of 1983 expressly provided that hospital 
payment disputes would be handled under existing appeals procedures but limited 



with respect to the Issues that could be appealed. 



266 



Congress specifically 



260 



Social Security Act § 1869(b)(2), 42 U.S.C. § 1395ff(b)(2) (1982 ed. , 
Supp. IT); 42 C.F.R. § 405.730 (1986). 

261social Security Act § 1155, 42 U.S.C. § 1320c-4 (1982 ed.. Supp. II); 42 
C.F.R. § 473.46(b) (1986). 



262 



Social Security Act § 205(g), 42 U.S.C. § 405(g) (1982 ed. , Supp. II). 



263soclal Security Act § 1878(a), 42 U.S.C. § 1395oo(a) (1982 ed., Supp. 
II); 42 C.F.R. § 405 . 1801- . 1890 (1986). In order for an Intermediary to provide 
a hearing, the amount in controversy must be at least $1,000. ]_d. at § 405.1811. 



^^^^Social Security Act § 1878(a). 42 U.S.C. § 1395oo(a) (1982 ed. , Supp. 
II); 42 C.F.R. § 405.1801(b)(1) (1986). 

2"^See table on PRRB performance statistics in Appendix C. 

266social Security Amendments of 1983, § 602(h), codified as amended in . 
Social Security Act §§ 1878(g)(2) and 1886(d)(7), 42 U.S.C. §§ 1395oo(g)(2) and 
1395ww(d)(7) (1982 ed. , Supp. IT). 

The Social Security Amendments of 1983 preclude administrative and judicial 
review of: (1) the establishment of DRG's, the methodology for classifying 
patient discharges Into DRG's and the appropriate weighting factors for PRG's; 



394 



ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 



intended that hospital appeals nver payment disputes be heard by the PRRB. as the 
House Ways and Means Committee explained: 

Your Committee's bill would provide for the same procedures 
for administrative and judicial review of payments under the 
prospective payment system as is currently provided for cost- 
based payments. In general, the same conditions, which now 
apply for review by the PRRB and the courts, would continue 
to apply. 2^'^ 

Thus Congress amended § 1878 of the Social Security Act to accord the PRRB 
Jurisdiction to hear challenges to the "final determination of the Secretary as 



to the amount of payment" under the prospective payment system 



268 



The PRRB . The PRRB, comprised of five members appointed for three year 
terms, knowledgeable in health care financing appointed by the Secretary, ^°^ 
adjudicates payment disputes between providers and fiscal intermediaries^ if 
the amount in controversy is at least $10,000 and the provider files a request 
for hearing within the prescribed time period. ^'^ A group of providers may bring 
a joint appeal if the disputed issues involve a common question of fact or 
Interpretation of law or regulation and the aggregate amount in controversy is 



and (2) the factor used in a hospital's current payment formula to ensure 
compliance with the so-called "budget neutrality" requirement that the 
prospective payment system result in total Medicare payments to hospitals In FY 
1984 and FY 1985 equal to what would have been payable under the previous 
Medicare payment methodology in those fiscal years. See notes 544-554 infra and 
accompanying text. 



26''h.R. Rep. No. 25, 98th Cong. 
23, 98th Cong., 1st Sess . 57 (1983). 



1st Sess. 143 (1983). See also S. Rep. No. 



2^®Soclal Security Amendments of 1983, § 602(h)(1), codified as amended In . 
Social Security Act § 1878(a)(1), 42 U.S.C. § 1395oo(a)(l) (1982 ed. , Supp. II). 

2^9social Security Act § 1878(h), 42 U.S.C. § 1395oo(h) (1982 ed . , Supp. 
II); 42 C.F.R. § 405.1845. Two board members must be representative of 
providers; and a quorum of three members, including at least one provider 
representative, is required for a PRRB decision. Id . 

P 7 

^ The parties before a Board hearing are the provider and its fiscal 
Intermediary. Social Security Act § 1878(a), 42 U.S.C. § 1395oo(a) (1982 ed., 
Supp. II). 



271 



Id 



MEDICARE APPEALS SYSTEM 395 

$50,000 or more. ^^ The PRRB has jurisdiction to adjudioato the Intermediary's 
determination of total reimbursement for services to Medicare beneficiaries and 
the intermediary's final determination of payment under § 1886(b) and § 1886(d) 
of the Social Security Act.2'73 ^^j, PRRB may also hear appeals regarding the 
intermediary's failure to furnish a provider with a final determination of the 
Medicare payment amount on a timely basis. The PRRB has no authority to 
adjudicate coverage issues^''^ nor the validity of Medicare regulations or program 
directives.^ In its decisions, the board must observe the statute and 
regulations as well as HCFA rulings and must "afford great weight" to 
interpretative rules and other HCFA direc:tives. 

Hearings before the PRRB are formal adjutJicative hearings. A provider may 

?7ft 

be represented by counsel, conduct prehearing discovery and, at the hearing, 



2'72social Security Act § 1878(b), 42 U.S.C. § 1395oo(b) (1982 ed., Supp. 
II) ; 42 C.F.R. § 405.1837. 

2'^^Socia] Security Act §§ 1886(b) and (d); 42 U.S.C. §§ ]395ww(b) and (d) 
(1982 ed; Supp. II) . 



2'74soclal Security Act § 1878(a)(1)(C); 42 U.S.C. § 1395oo(a) ( 1 ) (C) (1982 
ed. , Supp. II) . 

2'75social Security Act § 1878(g)(1), 42 U.S.C. § 1395oo(g)(l) (1982 ed . , 
Supp. II); 42 C.F.R. § 405.1873 (1986). 

^'^^ 42 C.F.R. § 405.1873 (1986). See HCFA Admr . Dec, Fob 15, 1980, rev'g , 
PRRB Dec. No. 79-D95, Dec. 17, 1979. This Deputy Administrator's decision was 
affirmed in Indiana Hospital Association v. Schweiker 544 F. Supp. 1167 (S.D. 
Ind. 1982), aff 'd sub, nom . , St. Francis Hospital Center v. Heckler, 714 F.2d 822 
(7th Cir. 1983), cert, denied , 465 U.S. 1022 (1980). 

Basically, the PRRB has authority to affirm, modify or reverse a final 
determination by the fiscal intermediary with respect to a cost report and to 
make any other revisions on matters covered by such cost report. Social Security 
Act § 1878(d), 42 U.S.C. § 1395oo(d) (1982 ed., Supp. II); 42 C.F.R. § 405.1869 
(1986) . 

2'7'7jd. at § 405.1867. 

2'^Sld. at § 405.1851. 



396 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

cross -exam 1 np wl tnessps . ^ '^ The fU)Jir(l has subpoena pcmer to nf»mpj'l HttinnlaiK f 

and testimony of witnesses as well as the production of documents and other 

evidence. ^^^ If a party raises an issue of HHS policy which is interpretative of 

the Medicare statute and regulations, the Board must promptly notify HCFA^^' 

Expedited review is available for issues of law over which the board has 

Jurisdiction but no authority to decifle. "^ A PRRH decision must be based on the 

hearing record and be supported by substantial evidence when the record is viewed 

as a whole. 2^^ The Board's decision is final.^^** 

The Secretary has authority to reverse, affirm or modify the Board's 

decision on his own motion and within 60 days after the provider is notified of 

the Board's decision. ^^^ The crit«!ria for reversal are that the Board has made 

an erroneous Interpretation of the law, regulations or HCFA ruling; the decision 

is not supported by substantial evidence; the case presents a siKnifir:ant policy 

issue that might lead to issuance of a HCFA ruling or other directive; the Board 

has incorrectly assumed or denier! jurisdiction; or the decision needs 

? ft fi 
clarification, amplification or at) altei'native legal basis.^ As will be 

discussed below, this review authority has been a source of serious provider 



♦ 



^'^^Social Security Act § 1878(c), 4?. U.S.C. § 1395oo(c) (1982 ed . , Supp. 
11); 42 C.F.R. §§ 405.1853 -.1855 (1986). 



280 



Id. at § 1857. 



2^^2£l. at § 405.1863. 

2S2j5opja2 Security Act § 1878(f), 42 U.S.C. § 1395oo(j) (1982 ed . , Supp. 
ri); 42 C.F.R. § 405.1842 (1986). This procedure has been used 160 times since 
its creation in 1981 and on .January 31, 1986. See table on PRRB performance 
statistics in Appendix C. 

2^3social Security Act § 1878(d), 42 U.S.C. § 1395oo(d) (1982 ed . , Supp. 
II) ; 42 C.F.R. § 1871(a) (1986) . 

284social Security Act § 1878(f)(1), 42 U.S.C. §1395oo(f ) ( 1 ) (1982 ed . , 
Supp. II); 42 C.F.R. § 1871(b) (1986). 

285social Security Act § 1878(f)(1), 42 U.S.C. § 1395oo(f)(l) (1982 ed . , 
Supp. II). The Secretary has delegated this authority to the HCFA Deputy 
Administrator. 42 Fed. Reg. 57,351 (1977). 

29^42 C.F.R. § 405.1875(c) (1986). 



MEDICARE APPEALS SYSTEM 397 

concern because of the high rate of reversals of PRRB decisions by the 
Secretary. 287 

A provider has the right to judicial review of any final decision of the 
Board or subsequent Secretarial action on that decision. 2^8 j^uit must be brought 
within 60 days of receipt of the Secretary's final decision in the federal 
district court of the judicial district in which the provider is located or in 
the District Court for the District of Columbia.^ A group appeal of several 
providers may be brought in the judicial district in which the greatest number of 
providers are located or in the District Court for the District of Columbia. ^^ 

It has yet to be determined how extensive or influential the role of the 
PRRB will be under the prospective payment system. The Board has not yet begun 
to hear hospital appeals of issues arising under the prospective payment system 
because of HCFA's requirement, discussed below, that the intermediary issue a 
notice of program reimbursement before a hospital may initiate an appeal to the 
PRRB.^^^ The PRRB still hears appeals of home health agencies and skilled 
nursing facilities as well as psychiatric and rehabilitation hospitals that are 
not paid under the prospective payment system. The PRRB also retains 
jurisdiction over a wide variety of issues for hospitals under the prospective 
payment system — including allowable hospital costs for the base year period; 
capital and educational costs; the status of hospitals or their components 
dispositive in determining whether or not the hospital or component is paid under 
the prospective payment system; and the applicability of exemptions, exceptions 
and adjustments such as those available for sole community hospitals and cancer 



?R7 

^ See notes 488-489 infra and accompanying text. 

2S8social Security Act § 1878(f)(1), 42 U.S.C. § 1395oo(f)(l) (1982 ed., 
Supp . II). 

It should be noted that there is no express authorization in the Social 
Security Act or regulations thereunder authorizing judicial review provider 
payment disputes under $10,000. 

289ld. 



290 



Id, 



29^See notes 465-472 infra and accompanying text. 

292see Owens, The PRRB Lives On As an Appeal Mechanism for Healthcare 
Providers , Health Care Fin. Management, Aug. 1986, at 36. 



398 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

hospi tfi 1 s 2^K'< I, j^ fxp»H tr«d that thfsf latrr twf» issues will gnneratf a 
rons i (lerabl e volume of appeals and litigation because of the signifirant 
financial ramifications for hosi)itals of such status detfirminat ions . ^^"^ 

The PRRB also has a considerable backlog of hospital appeals on issues 
arising undf^r the hospital r;ost reimbtirsj^merit system, i.e., allocations for labor 
and delivery room and malpractice insurance costs ^'••'i However, the number of 
appeals before the PRRB has increased considerably since 1981. As indicated in 
the table on PRRB performanf e statistics in Appendix (' , PRRB appeals increased 
00*. between 1981 and 1982, remair)ed constant the following year, and increased 
40% between 198-1 and 1985. But, irrespective of what transpires under the 
prospective payment system, the Boaid anticipates that it will continue to hear a 
high volume of hospital appeals until well beyond 1987 as well as a rising volume 
of home health agency appeals and skilled nursing facility appeals 
indefinitely. ^^ 

PRO Appeals for Hospital s. For hospitals, PHOs aJso adjudicate certain 
coverage issues related to payment arising under the pi'ospective payment system. 
These include (1) disput«!s over outliers (cases which greatly exceed the length 
of stay and/or the estimated costs of the DRG in which the outlier case is 
assigned) , ^^^ and (2) errors in ORG coding for a particular case.^^^ HCFA 
adopted this approach maintaining that the entity that makes the initial 
determination should hear tlit^- ;ippea].^^^ HCFA has also decided that the "waiver 
of liability" regulations will govern hearing and appeals if the PRO denies an 



^^'^ See Owens, sup ra note P92 at 36 40 ; Clinton, Provider Appeals Route 
Evolvin g Under the Me d icare Prospective Payment System , Health f, . Vigil, Nov. 29. 
1985. at 19-24; Clinton, PRRB Appe al s Ev olving Und er PPS . The Health Law.. Winter 
1985, at 1. 14-1.5. 



294 



See general l y Owens , s upra note 292 



^^"^Owens, s upra note 292. 



^^f^ui. ; Clinton, sup ra note 29v3, at 19. 

See note 159 supra and accompanying text 



^^^Preamble to Interim Final Rule, 48 Fed. Reg. 39,740, 39,785-786 (1983) 
299ld. at 39,785. 



MEDICARE APPEALS SYSTEM 399 

entire stay or a "day" or "cost" outlier under § 1862(a)(1) or § 1861(a)(9) of 
the Social Security Act because services rendered were neither medically 
necessary, reasonable or constituted custodial care.**^" If the provider is 
dissatisfied with a PRO determination, it may seek a reconsideration by the PRO; 
however, the provider is not entitled to further administrative or judicial 
review of the PRO determination. "^ 

3. Appeals Under Part B 

In the Social Security Amendments of 1965, Congress specifically precluded 
administrative and judicial review for beneficiary and provider disputes arising 
under Part B of the Medicare program on the assumption that the amounts involved 
in Part B claims would be small and therefore elaborate appeals procedures would 
be unnecessary .^^^ The only provision for appeals regarding Part B benefits that 
Congress made was a requirement in each carrier contract that the carrier: 

establish and maintain procedures pursuant to which an 
Individual enrolled under this part [Part B] will be granted 
an opportunity for a fair hearing by the carrier. In any case 
where the amount in controversy is $100 or more, when 
requests for payment under this part with respect to services 
furnished him are denied or are not acted upon with 
reasonable promptness or when the amount of such payment is 
in controversy. "^ 

These fair hearing appeal procedures are available to any beneficiary and to any 



^^'^id. at 39,784. See 42 C.F.R. §§ 405.330-.332 (1986). 

30'Social Security Act § 1155. 42 U.S.C. §1320c-4 (1982 ed. , Supp. II). 

^^^See notes 214-215 supra and accompanying text. 

303soclal Security Act § 1842(b) (3) (C) ; 42 U.S.C. § 1395u(b) (3) (C) (1982 
ed., Supp. II). See 42 C.F.R. § 405.801 et seq . (1986). 

In Gray Panthers v. Schweiker , 652 F.2d 146 (D.C. Cir. 1980), the United 
States Court of Appeals for the District of Columbia Circuit ruled that 
procedural due process required more formal hearing procedures and additional 
protections for beneficiaries in cases of disputed claims of less than $100 than 
accorded under a carrier's paper review of its Initial determination on the 
claim. See notes 504-509 infra and accompanying text. 



400 



ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 



provider who has accepted assignment of a beneficiary's rlala for Part B 
benef Its.^^'* 

Upon making an initial determination of the noverape and amount of Medicare 
benefits, the carrier issues the "Explanation of Medicare Benefits" (EOMB) which 
specifies that the beneficiary and his assignee, i.e., the provider who accepts 
assignment, Is entitled to a review of the carrier's initial determination. ^^^ 
In this review determination, the carrier must make a separate determination 
affirming or revising the initial determination.*'"^ The notice of this review 
determination must expressly state the basis for the determination and advise the 
beneficiary of the right to a fair hearing if the amount in controversy is $100 
or more.^" In 1984, carriers received 3.2 million requests for Part B review 
determinations and, of the 3 million processed to completion, 57% reversed the 
initial determination at an average cost per claim of $118 and an aggregate cost 
of $205 mi 11 ion. ^^^^ 

The fair hearing for claims of $100 or more is an oral hearing conducted by 
a hearing officer selected by the carrier. ^"^ At a fair hearing, the hearing 
officer may be disqualified if "prejudiced or partial with respect to any party" 
or has "any interest in the matter before him." The regulations expressly 
provide that the fact that a hearing officer is an employee of the carrier may 
not serve as "prima facie cause for disqualification" ^ and, as a matter of 
fact, many hearing officers are carrier employees. The regulations do allow a 



ed 



3°'*Social Security Act § 1842(b)(3)(C), 42 U.S.C. § 1395u(b) (3) (C) (1982 
Supp. II); 42 C.F.R. § 405.801 (1986). 



305 



Id. at § 405.807, 



306 



Id. at § 405.810 



307 



Id. at § 405.811 



^"^Congressioni Research Service, Medicare Appeals: Background Paper (Oct. 
1985) , reprinted in , Senate Finance Comm . Hearings on Medicare Appeals 
Provisions. 



309 



42 C.F.R. § 405.830 (1986) 



31°Id. at § 405.824 



311 



Id 



MEDICARE APPEALS SYSTEM 401 

party to challenge the hearing officer on bias grounds. ^^^ In 1984, carriers 
received about 30,000 requests for fair hearings and, of those processed to 
completion, 63% were decided in favor of the beneficiary at an average cost per 
claim of $439 and an aggregate of $5.8 mill ion. ^^^ 

At the fair hearing, the parties and anyone else the hearing officer deems 
necessary may appear and parties may be represented by counsel. ''^^ Parties may 
present evidence, examine all witnesses, make oral argument and submit brief s.^-^^ 
A record is made and is available upon request to the parties and HCFA.*^^ The 
hearing officer's decision must be based on the record, be in writing and contain 
findings of fact and statement of reasons for the decision. ^^' The decision Is 
final unless reopened and modified as provided in the regulations. "^^° There is 
no administrative or judicial review of the hearing officer's decision which, as 
will be discussed below, has raised much controversy in recent years. ^^^ As will 
also be discussed below, the Supreme Court, In Schweiker v. McClure ^^" and 



^^^^d. at § 405.824. 

"^•^^Congressional Research Service, Medicare Appeals: Background Paper (Oct. 
1985), reprinted in , Senate Finance Comm. Hearings in Medicare Appeals 
Provisions , at 16. 

^^^Id. at § 405.830. 

315irt, at § 405.830. 

^l^Jd. at § 405.833. 

3^'^Id. at § 405.834. 

'"^l^Id. at § 405.841. 

^l^Social Security Act § 1869, 42 U.S.C. § 1395ff (1982 ed. , Supp. II). See 
notes 519-523 infra and accompanying text. 

^20456 U.S. 188 (1982). 



402 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

United States v. Erlka, ^^^ has upheld the statutory preclusion of judicial review 
of claims under Part B.^^^ 

4 . Watver of LlabUlty Appeals 

An Important but distinct part of the benefit coverage determination under 
both Part A and Part B is the determination of whether the beneficiary or the 
provider should be financially liable for services that are determined to be not 
covered according to the medical criteria of being medically unnecessary or not 
provided In the appropriate setting, or constituting custodial care. '■^ 
Waiver of liability determinations are generally made at the same time coverage 
determinations based on medical criteria are made. Thus, the PRO makes the 
waiver of liability determinations for hospital benefits; fiscal intermediaries 
make the waiver of liability determinations for skilled nursing and home health 
benefits; and carriers make these determinations for Part B services . ^^'* 

A waiver of liability may apply where the beneficiary and/or the provider 
had no reason to know that the services would not be covered. In these cases, 
the Medicare program absorbs the cost of the uncovered services although the 
provider and beneficiary are then on notice for the future that such services are 
not covered. "^^^ As explained above, Congress adopted thi.. ....iver of liability 

policy in the Social Security Amendments of 1972 to address provider and 
beneficiary concerns about unpredictable and often inconsistent retroactive 
denials of coverage by fiscal intermediaries and carriers. ^^" 

With respect to beneficiaries, there Is a strong presumption that the 
beneficiary did not know that the services in question were excluded from 
coverage and thus entitled to a waiver of liability which can be overcome only by 
demonstrating that the beneficiary knew or had reason to know that the .services 



32I456 U.S. 201 (1982) . 

^2^See notes 523-529 infra and accompanying text. 

323social Security Act § 1879. 42 U.S.C. § 1395pp (1982 ed . , Supp. II); 42 
C.F.R. §§ 405.330-.332 (1986). 

^^'*42 C.F.R. § 405.710 (1986) (Part A coverage Issues for skilled nursing 
and home health services); id. at § 473.16 (hospital services); id. at § 405.807 
(Part B coverage Issues). 

^^-''Social Security Act § 1879(a), 42 U.S.C. § 1395pp(a) (1982 ed., Supp. II). 

^^^Social Security Amendments of 1972, § 213(a), codified as amended In , 
Social Security Act § 1879, 42 U.S.C. § 1395pp (1982 ed . , Supp. II). See notes 
227-231 supra and accompanying text. 



MEDICARE APPEALS SYSTEM 403 

in question were not covered. ^' These presumptions in favor of the beneficiary 
are quite strong, and several courts have reiterated the great burden HHS has in 
demonstrating that the beneficiary had knowledge that past and even future 
services were not covered. ^^^ 

The criteria for whether the provider had knowledge that the services were 
uncovered are less strict. If the intermediary or the institution's utilization 
review committee told the provider that the services or similar services were not 
covered, then the provider is deemed to have knowledge for purposes of denying a 
waiver of liability . ^^^ As a practical matter, most waiver of liability issues 
concern the provider's rather than the beneficiary's liability for uncovered 
services. Until recently, HCFA had a procedure whereby providers under Part A 
were deemed to be entitled to a waiver of liability if the rate of coverage 
denials for the provider was below a certain percent. However, In March 1986, 
HCFA promulgated new rules on waiver of liability which discontinued this 
favorable presumption procedure and required that waiver of liability be 
determined on a case-by-case basis for all providers under Part A and Part B.^^^ 

The right to challenge a waiver of liability decision rests chiefly with the 
beneficiary and only secondarily with the provider. For Part A, a beneficiary 
may appeal the final decision of the fiscal intermediary or PRO (in the case of 
hospitals) on waiver of liability to an ALJ in the SSA Office of Hearings and 
Appeals if the amount in controversy is $100 or more.*^^-^ The beneficiary is 
entitled to reconsideration by the SSA Appeals Council'^^^ and may seek judicial 
review of the final agency decision on waiver of liability, if the amount in 



327social Security Act § 1879(c), 42 U.S.C. § 1395pp(c) (1982 ed. , Supp. 
II); 42 C.F.R. § 405.332 (1986). In order to demonstrate that a beneficiary knew 
or had reason to know that items or services furnished to him were excluded from 
coverage, the beneficiary, or someone acting on his behalf, must have received 
written notice stating that the items or services were excluded from coverage. Id . 

^^^ See, e.g. , Himmler v. Califano, 611 F.2d 137 (6th Cir. 1979); Walsh v. 
Secretary of U.S. Dept. of Health and Human Services, 636 F. Supp. 358 (E.D.N.Y. 
1986) (held against beneficiary due to receipt of written notice); Malvasi v. 
Harris, No. 79-CV-635 (N.D.N.Y. Jul. 30, 1980). 

32942 C.F.R. § 405.341 (1986). 

33O51 Fed. Reg. 6,222 (1986), codified in . 42 C.F.R. § 405.336 (1986). 

331soclal Security Act § 1867(d). 42 U.S.C. § 1395pp(d) (1982 ed. , Supp. II). 

33^42 C.F.R. §§ 405.727 and .967 (1986). 



404 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

I 

controversy is $1,000 or more.^"^^ Section 1879(d) permits the provider to appeal 
a coverage issue to an ALJ and federal district court where a waiver of liability 
Is not eranted for the provider but only If the beneficiary decides not to 
appeal .^'^ 

The waiver of liability requirement for hospitals Is somewhat different. If 
the PRO determines that the waiver should apply to uncovered services, the 
hospital has no right to appeal even if It disagrees about the underlying 
coverage determination.^^''' If the PRO determines that the care was unnecessary 
and denies the waiver because the hospital knew or should have known so, the 
hospital Is entitled to a hearing before an ALJ In SSA of whether it had 
knowledge that care was not covered but cannot challenge the substantive coverage 
decision upon which the denial of the waiver was predicated. ^^ Hospitals may 
also seek Judicial review for such decisions involving claims of $2,000 or 
more.^^'^ 

Under Part B, a beneficiary may appeal a review determination of the carrier 
on waiver of liability to a hear Jng of fleer selected by the carrier if the amount 
in controversy is $100 or more.^^° If the provider is found liable for the 
service and the beneficiary does not exercise his appeal rights, the provider may 



^^^soclal Security Act § lfi69(b)(2). 42 U.S.C. § 1395ff(b)(2) (1982 ed. 
Supp. II); 42 C.F.R. § 405.730 (1986). 



ri) 



^^'^Social Security Act § 1879(d). 42 U.S.C. § 1395pp(d) (1982 ed . , Supp 
Judicial Review Is available only for claims exceeding $1000. Id. 



33^Social Security Act § 1155, 42 U.S.C. 
§ 1320C-4 (1982 ed . , Supp. II). 



336 



337 



Id. 



Id 



338social Security Act § 1842(b)(3)(C), 42 U.S.C. § 1395u(b) (3) (C) (1982 
ed., Supp. II); 42 C.F.R. § 405.820 and .823 (1986). 



MEDICARE APPEALS SYSTEM 405 

request a hearing before the carrier. ^^^ There is no judicial review of a 
carrier decision on a waiver of liability determination for Part B benefits 



340 



C . Recent CongressionaJ Action on Medicare Appeals 

With the implomentation of the prospective payment system, Congress and HHS 
as well as beneficiary and provider interest groups have become quite concerned 
about the Medicare appeals system. Three factors have precipitated this 
concern. ^^-^ First, there had been ongoing congressional concern about appeals 
under Part B as a result of reported underpayment by the Medicare program for 
Part B benefits as documented In several reports of the General Accounting 
Office'^'*^ and court challenges and decisions on the constitutionality of Part B 
hearing procedures . "^^"^ Second, there were reports that hospitals were 
discharging patients earlier and in a sicker condition as a direct result of 
implementation of the prospective payment system and that many patients, wishing 
to remain in the hospital, had inadequate information about their appeals rights 
to protest such hospital actions.^'*'* Third, early in 1985, provider and consumer 



339 



Id, 



^^^Social Security Act § 1879(d), 42 U.S.C. § 1395pp{d) (1982 ed., Supp. II). 

^'^^See Congressional Research Service, Medicare Appeals Background Paper , 
reprinted in . Senate Finance Comm. Hearings on Medicare Appeals Provision . 

^'^^Government Accounting Office, Reasonable Charge Reductions under Part B 
of Medicare (HRD-81-12, Oct. 22, 1980); Government Accounting Office, More Action 
Needed to Reduce Beneficiary Underpayments (HRD-81-126, Sept. 3, 1981); 
Government Accounting Office, Medicare Part B Beneficiary Appeals Process (HRD- 
85-79, June 28, 1985). 

^"^^See United States v. Erika, Inc. 456 U.S. 201 (1982); Schwelker v. 
McClure, 456 U.S. 188 (1982); Gray Panthers v. Schwelker, 652 F.2d 146 (D.C. Cir. 
1980) and 716 F.2d 23 (D.C. Cir. 1983). See notes 508-514 infra and accompanying 
text. 

^^'* See Senate Special Comm. on Aging, Hearings on Quality of Care Under 
Medicare's Prospective Payment , Sustaining the Quality of Health Care Under Cost 
Containment: Joint Hearing Before the House Select Comm. on Aging and the Task 
Force on the Rural Elderly , 99th Cong., 1st. Sess. (1985); Medicare Beneficiary 
Appeals Process Technical Appendixes to the ProPAC Report and Recommendations to 
the Secretary, April 1, 1986 , Appendix C, at 162. Government Accounting Office, 
Information Requirements for Evaluating the Impacts of Medicare Prospective 
Payment on Post-Hospital Long-Term-Care Services: Preliminary Report (PEMD 85-8, 
Feb. 21, 1985) See notes 427-436 infra accompanying text. 



406 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

organizations created a coalition specifically to pressure Congress for reforas 
of the Medicare appeals system. 

In 1985. several congressmen Introduced legislation to reform the Medicare 
appeals system. ^'*^ The most Important of these bills was Congressman Wyden ' s 
bill, H.R. 2864, The Pair Medicare Appeals Act,^'*'^ which Congress included in its 
FY 1986 budget bill for COBRA in October 1985.^'*^ H.R. 2864, which was similar 
to S. 1551, The Fair Medicare Appeals Act,^'*^ introduced by Senators Durenberger, 
Heinz and Chafee and upon which hearings were held in November 1985,^^^ provided 
for administrative appeal of Part B claims of $500 or more before an ALJ and 
judicial review of claims of $1,000 or more. In addition, both H.R. 2864 and S. 
1551 would have allowed providers to represent beneficiaries in appeals. 

The COBRA conference committee, whose report was ultimately rejected by the 
House, adopted these Medicare appeals provisions and also a requirement that a 
national coverage determination made pursuant to § 1862(a) ( 1 ) (A)^^^ by HCPA after 
consultation with the Public Health Service and published in the Medicare 



^^^ See Peterson, Legislative Changes Urged Regarding Medicare Appeals , 
Health L. Vigil, May 3. 1985, at 12. 

This coalition included representatives of the American Hospital 
Association, the American Association of Homes for the Aging, the American 
Association of Retired Persons, the Catholic Health Association, the Federation 
of American Hospitals, the National Association for Home Care, and the National 
Senior Citizens Law Center and developed recommendations for a variety of reforms. 

^'*^0n January 22, 1985, Congressman Chappell introduced H.R. 579 to allow 
administrative review of claims under Part B of the Medicare program of $50 or 
more and judicial review of claims of $1,000 or more. H.R. 579, 99th Cong., 1st 
Sess. (1985); 131 Cong. Rec. H129 (daily ed . , Jan. 22, 1985). 

^'^'^H.R. 2864, 99th Cong., 1st Sess. (1985) 131 Cong. Rec. H4845 (dally ed. 
June 25. 1985) . 

348h.r. 3128. 99th Cong.. 1st Sess. (1985). 

349s. 1551 99th Cong.. 1st Sess. (1985); 131 Cong. Rec. § 10790 (daily ed. 
Aug. 1. 1985). 

^'''"See Senate Finance Comm. Hearings on Medicare Appeals Provisions . 

35^Social Security Act § 1862(a)(1)(A), 42 U.S.C. § 1395y(a)(l)(A) (1982 
ed. , Supp. II ) . 



> 



MEDICARE APPEALS SYSTEM 407 

Coverage Issues Manual ^^^ cannot be reversed on appeal. The conferees also 
stated their expectation as to how HHS would handle Medicare appeals with the 
Increased workload imposed by the bill: 

With the additional workload that would be established under 
the bill, it is the conferee's expectation that HHS would 
give serious consideration to establishing a separate office 
of hearings and appeals for HCFA or otherwise creating a 
group of hearing officers devoted exclusively or 
predominately to Medicare appeals. ^^ 

Congress dropped these appeals provisions from COBRA prior to enactment at the 
request of the Reagan administration. 

Congress has also exhibited interest in Medicare appeals issues in this 
session of Congress. On March 17, 1986, Congressman Archer introduced a bill to 
improve the review procedure for all Social Security programs including 
Medicare. "^^^ Specifically, the bill would establish a Social Security Court with 
exclusive jurisdiction over various provisions of the Social Security Act, 
abolish the Appeals Council, and accord judicial review in the Social Security 
Court for any Individual who Is a party to any final decision of the Secretary or 
for whom the Secretary has delayed his final decisions longer than 90 days after 
an AL J ' s determination. Also, the House Budget Committee has Included a 
provision In its budget bill in FY 1987 nearly identical to the provision dropped 
from COBRA last year that would provide administrative review and judicial review 
for Part B claims. ^^^ Those bills as well as the bills introduced in the last 
session of Congress bear witness to Congress's continuing concern about the 
Medicare appeals system. 



"^^^See note 29 supra and accompanying text. 

^^^Proposed H.R. Rep. No. 453, 99th Cong., 1st Sess. (1985) (the House never 
adopted this conference report). 

^^^H.R. 4419, Social Security Procedures Improvement Act of 1986, 99th 
Cong., 2d Sess. (1986); 132 Cong. Rec. H1204 (daily ed. March 17, 1986). 

355h.r. 5300, § 4532, 99th Cong., 2d Sess. (1986). See H.R. Rep. 727, 99th 
Cong., 2d Sess. 95-96 (1986). 



408 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

CHAPTER IV: PROGRAM ADMINISTRATION ISSUES 

The Medicare progran nakes extraordinary and unprecedented use of private 
organizations to perforn Important administrative, monitoring and adjudicative 
functions for the Medicare program to the extent that most beneficiaries and 
providers rarely have direct contact with HCFA regarding Medicare coverage and 
payment determinations. Beneficiaries and providers have raised consistent 
complaints about how HHS, HCFA and Its fiscal intermediaries, carriers and, more 
recently, PROs , have administered the Medicare program with respect to coverage 
and payment matters. There are three major concerns in this regard. First is 
the way In which HCFA and Its fiscal intermediaries and carriers make coverage 
and payment determinations in individual cases. Second is the process that HHS 
and HCFA have followed in updating the hospital payment rates under the 
prospective payment system. Finally, is HCFA's Implementation of the PRO program 
almost completely through program instructions rather than Informed rulemaking. 

A. Intermediary and Carrier Coverage and Payment Determinations 

Inherent In the administrative Job of determining coverage of and payment 
for the health care services reflected in the 366 million claims of 30 million 
beneficiaries are multiple opportunities for discretionary action by the 
thousands of employees of fiscal Intermediaries, carriers and PROs. The 
decisions to be made are highly technical and individualistic and cannot always 
be made exclusively with reference to a general regulation. Further, there is 
great pressure on fiscal intermediaries, carriers and PROs to make these 
determinations efficiently and as strictly as possible in order to control the 
administrative costs of the Medicare program. 

There are three specific concerns with respect to how fiscal Intermediaries 
and carriers make coverage and payment determinations In Individual cases. 
First, the standards and guidelines for making coverage and payment decisions are 
contained in health Insurance manuals and program Instructions that are not 
promulgated under § 553 of the Administrative Procedure Act^^'^ and are not 



^^"The question of whether the delegation of adjudicative authority to 
fiscal Intermediaries and carriers is constitutionally valid has been raised and 
addressed In several Judicial decl.slons: Chelsea Community Hospital v. Michigan 
Blue Cross Association, 630 F . 2d 1131 (6th Cir. 1980); St. Louis University v. 
Blue Cross Hospital Services, 537 F. 2d 283 (8th Cir.) cert, denied , 429 U.S. 977 
(1976); St. John's McNamara Hospital v. Associated Hospital Services, Inc., 410 
F. Supp. (D.S.D. 1976); Langhorne Gardens, Inc. v. Weinberger, 371 F. Supp. 1216 
(E.D. Pa. 1974); Temple University v. Associated Hospital Services of 
Philadelphia, 361 F. Supp. 263 (E.D. Pa. 1973); Coral Gables Convalescent Home, 
Inc. V. Richardson, 340 F. Supp. 646 (S.D. Fla. 1972). In these cases, the 
courts have ruled that the delegation was appropriate provided that certain 
safeguards (e.g., opportunity for fair hearing) were present. See Homer & 
Platten, supra note 217, at 123-129. 



357 



5 U.S.C. § 553 (1982 ed.. Supp. II) 



MEDICARE APPEALS SYSTEM 409 

readily accessible to beneficiaries or even providers. "^^ Second, fiscal 
intermediaries, carriers and now PROs , bound by restrictive HCFA program 
directives and subject to cost containment pressures imposed by their contracts 
with HCFA, are extremely strict in their coverage and payment determinations and, 
unfortunately, often wrong. Third, the manner in which carriers, fiscal 
intermediaries and also PROs advise beneficiaries and providers about coverage 
and payment determinations is very complex and often unclear and, in the case of 
beneficiaries, effectively precludes many beneficiaries from exercising their 
appeal rights in an informed fashion. 

1 . Use of Unpublished Standards and Guidelines 

A major criticism of the coverage determination process is that HCFA has 
defined criteria for coverage through agency manuals and other program 
instructions that are not promulgated as rules under the Administrative Procedure 
Act. These materials often further define coverage of Medicare benefits and 
can be critical in determining coverage in questionable cases. Also, these 
manuals are very complex and often inaccessible as well as incomprehensible to 
the average beneficiary or his representative .^^^ But perhaps the most 
disturbing problem is that fiscal intermediaries and carriers often make coverage 
and payment decisions according to informal, unwritten policies that are used in 
the organization's insurance business and are not even HCFA program instructions. 

This later problem is exemplified in the recent case. Fox v. Bowen ,^^^ 
involving the practice of one fiscal intermediary making coverage decisions about 
physical therapy services for patients in skilled nursing facilities on the basis 
of "rules of thumb" — i.e., no coverage for non-weightbearing limbs, termination 
of benefits when patients can walk fifty feet, or no coverage for amputees who 
are not being fitted for a prosthesis — that are not published in regulations, 
HCFA manuals or other official Medicare program instructions, and are 
inconsistent with existing regulations and manual provisions pertaining to 
coverage of physical therapy services. *^°^ In Fox v . Bowen , the United States 
District Court for Connecticut ruled: 

It is contrary to such regulations for an Intermediary to 
deny benefits on the basis of informal presumptions or "rules 
of thumb," that are applied across the board without regard 



^^°See notes 28-29 supra and accompanying text 
■^^^See notes 28-29 supra and accompanying text 



360 



Id, 



3^1 [1986-2 Transfer Binder] Medicare & Medicaid Guide (CCH) ![ 35,374 (D. 
Conn. Apr. 2, 1986). 

36242 C.F.R. §§ 409. 30-. 36 (1986); HHS , Skilled Nursing Manual (HIM-13) § 
3101 .08 M98fi^ . 



410 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

to the medical condition or therapeutic requirements of the 
Individual patient. ^^^ 

2 . Restrictive Intprpretat inns of Coverage Rules 

The Medicare program encourages fiscal intermediaries and carriers to 
construe Medicare coverage rules strictly in order to minimize costs to the 
Medicare program and has done so since the early 1970s. ^^'* Specifically, in its 
health insurance manuals and other program directives, HCFA interprets statutory 
definitions of benefits more restrictively . An early example of this practice 
was the strict interpretation of "skilled nursing care" and expansive 
interpretation of "custodial care" In 1972 in order to reduce utilization of 
skilled nursing facility benefits by Medicare benef Iciar ies . ^^^ HCFA. fiscal 
intermediaries and carriers currently engage in this practice throughout the 
Medicare program. 

For example, in determining the reasonableness of physician fees under Part 
B, HCFA and carriers use an especially restrictive formula for calculating the 
reasonable charge which results in a low level of payment for physicians' 
services. In FY 1984. reasonable charge reductions -- i.e., the difference 
between the physician's billed charge and what the carrier calculates as the 
reasonable charge for purposes of Medicare payment -- were made on 83.1% of 
unassigned claims for a total of $2.7 billion which was picked up by 
beneficiaries and averaged $29.69 per approved claim. '^"' 

Certain practices regarding coverage determinations for home health services 
also deserve attention. The first is HCFA's "technical denials" policy pursuant 
to which the fiscal intermediary must deny payment for home health visits on 
ground.s that the visit did not meet statutory or regulatory coverage 
requirements, i.e., the beneficiary was not "confined to home" or was not "in 



363 



[1986-2 Tranfer Binder] Medicare & Medicaid Guide (CCH) 1 35.374. at 10.938. 



''^^See Butler, An Advocate's Guide , supra note 227; Wilson, Benefit Cutbacks 
in the Medicare Program Through Administrative Agency Fiat Without Procedural 
Protections: Litigation Approaches on Behalf of Beneficiaries , 16 Gonz. L. Rev. 
533 (1981) . 

^^^See notes 228-230 supra and accompanying text. 

•^""See Government Accounting Office, Reasonable Charge Reductions Under Part 
B of Medicare (HRD-81-12, Oct. 22. 1980); Government Accounting Office. More 
Action Needed to Reduce Beneficiary Underpayments {HRD-81-126. Sept. 13. 1981). 
See also Government Accounting Office, Medicare Part B Beneficiary Appeals 
Process {HRD-85-79. June 28. 1985). 

qc'7 

**" 'Congressional Research Services. Physician Reimbursement Under Medicare: 
Background Paper , reprinted in . Senate Finance Comm . Hearings on Reform of 
Medicare Payments to Physicians , at 2. 26. 



MEDICARE APPEALS SYSTEM 411 

need of jntermittent skilled nursing care."'^^^ Since these denials are not made 
on raedlnal grounds, they are not subject to the waiver of liability rules; and 
thus the home health agency often has no way to appeal the determinations. 
Providers argue that the coverage requirements of being "confined to home" and 
"in need of skilled nursing care" involve medical determinations and should be 
subject to the waiver of liability rules.^^^ 

Another concern of home health agencies is HCFA's recent practice of denying 
coverage on essentially a statistical basis by using a sample of claims to 
project the total amount of overpayment that should be assessed for a cost year. 
HCFA effectively demands repayment for hypothetical claims that are not 
identified with a real claim. In a beneficiary appeal before on ALJ, In re 
Albuquerque Visiting Nursing Services, Inc. ,^^'^^ HCFA justified this approach on 
grounds of its "enormous logistical problems in enforcement."^'^ The ALJ ruled 
that this practice was illegal, stating: 

Difficulty in enforcement cannot in any case confer authority 
for the government to act in contravention of law, or confer 
authority for the government to take action against 
individuals or private organizations where no such authority 
has been granted by Congress. The procedures for processing 
Medicare Part A claims, the remedies for recovery of 
overpayment on improper claims, the rights of the parties 
against each other, and the rights to appeal are all clearly 
delineated in the statutes and the regulations fully 
promulgated thereunder. Use of a sampling method contravenes 
those procedures and abrogates those rights. See 42 U.S.C. 
1395ff and 1395pp and 42 C.F.R. 701 et seq. Individual 
review of each case is mandated. The liability of the 
provider, the individual and HCFA may only be determined by a 
fact review of each case. Id. 



372 



On February 20, 1986, HCFA issued HCFAR-86-1 specifically authorizing 
Medicare carriers, fiscal intermediaries and PROs to use statistical sampling to 
project overpayments to providers and suppliers "when claims are voluminous and 



36^42 C.F.R. § 405.234 (1986). 

^^^See Senate Finance Comm. Hearing on Medicare Appeals Provisions at 48-49 
(statement of the Catholic Health Association on Medicare Appeals) and 129-132 
(statement of the National Association for Home Care). 

^"^^No. HIP-000-61-0022 (Office of Hearing and Appeals, Social Security 
Administration, Jul. 1, 1985). 



371 



372 



Id. 



Id. 



412 ADMINISTRATIVE CONFERENCE OF THE UNITED STATES 

reflect a pattern of erroneous hilling or overuti 1 Izat Ion and when a case-by-case 
review